Spain Bank Shares Plunge

Not surprising news really. When you’ve been in denial for so long this is what you should expect. Spanish banks lost as much as 8 percent at Monday’s market opening (before recovering later) after the government announced the first intervention in a Spanish bank since 1993. The euro was also down 0.9 percent on the day at $1.3177 at 12:000.

From the Wall Street Journal this morning:

Spanish banking stocks plunged Monday as a banking bailout announced this weekend indicated the country’s financial sector may not be as immune to the current financial crisis as previously thought.

The Bank of Spain has taken over management of small savings bank Caja Castilla La Mancha and will provide it with as much as EUR9 billion of liquidity, the government said Sunday.

Stocks in Banco Santander SA (STD) fell 5.6% to EUR5.04 at 0749 GMT, while rival BBVA (BBV) was down 4.4% to EUR6.05, and Banco Popular SA (POP.MC) fell 5.5% to EUR4.68, pressuring the IBEX-35, which declined 3.1%.

Spanish Finance Minister Pedro Solbes Sunday said the intervention in Caja Castilla La Mancha was an isolated case, and that the overall Spanish banking system remained “extremely healthy.”

Yet some analysts are not convinced. “This intervention supposes that the Spanish financial system isn’t immune to the international situation,” Banesto analyst Ignacio Soto Palacios. “We expect a bad performance of the sector in the short run.”

In the short run, in the medium run, and in the long run, if I may be so bold.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

5 thoughts on “Spain Bank Shares Plunge

  1. Edward Hugh,

    Spanish bank stocks fell less that day than bank stocks of other Eurpean countries. A surprise?

    A year ago, it seemed that the Spanish banks were entering the recession in a robust state of financial health. So far they have come through the world financial crisis – far more threatening than the recession which looked likely – with astoundingly little damage.

    There are weaknesses in the system, especially in the savings banks (the Cajas de Ahorros). The savings bank that has been taken over by the Spanish central bank appears to have been brought down by this weakness – lending concentrated on loans to friends of the bank’s direction. In this case, as in the case of some of the other savings banks at risk, the damage was made worse by both the borrower and lender being friends of locally dominant politicans with a weakness for uneconomic show projects.

    To a degree, the Spanish financial system reminds me of the way Hong Kong used to be: a lot of crony banking combined with an able central bank with foresight. It has passed through my mind to wonder if Banco Santander could turn into the next HSBC.

  2. Hello Diversity,

    “Spanish bank stocks fell less that day than bank stocks of other Eurpean countries. A surprise?”

    Look, nothing surprises me about banks. Basically you need to read around my other macro analysis posts, both here or on Spain Economy Watch blog, or this is going to seem very extreme, but essentially I hold the view that Spain is now effectively bankrupt, its just we can’t quite see it yet.

    Spain’s banks escaped largely unscathed in the first rounds of bank problems since they were essentially exposed to the lending that had been going on in Spain, and this was mainly implemented, if not using traditional instruments (covered bonds are hardly that traditional), at least with less highly leveraged ones. So the melt-down is not so dramatic.

    Also, Spain lending is on a full-recourse basis (so people can’t turn the page and leave the loan behind them) and unemployment benefit runs for 2 years at comparatively high levels of previous salary. Both of these items make the crisis a much slower-burn one than the more spectacular version we saw in the US, but it is not necessarily any the better in the long run for that.

    Jaime Caruana was only not preoccupied in 2005 when he described Spanish property prices as 30% over valued due to these “cushions”. He simply couldn’t envisage the duration and severity of the bubble crash.

    (Although how you can describe someone who considered that property was 30% over-valued and then sat back and did nothing about it as far sighted, is a mystery to me. The only sense of vision he had was to get the hell out of it for an IMF job before the storm broke, I suppose, leaving poor old Fernandez Ordoñez there to “face” the music.

    My opinion is that a major bank meltdown is now inevitable in Spain – as explained in other posts, neither monetary nor fiscal policy are working, so both the steering and the brakes on the car are now broken. We won’t hit the buffers at the end of the track tomorrow, but as the toxic debt simply accumulates and accumulates we will eventually. Spain’s economy is in free fall, and there isn’t a safety net out yet to catch it.

    My best guess is still that the real crunch will come in 2011, although that doesn’t mean something shouldn’t be done tomorrow – like a major intevention from Brussels, backed by a large, very large – say 500 billion euro – cash injection. Spain’s political class are now totally out of their depth on this, but over in Brussles they don’t seem to have the political will to do anything at the moment. We are like Ulysees in the land of the Lotus Eaters.

    However, I want to stress: this won’t blow up tomorrow (although it will blow up). There is fire power left in the Spanish bank armada yet awhile.

    Basically there are three lines of defence surrounding and protecting the government treasury (which is where the command bunker now is) – the cajas, the middle banks (Sabadell, Popular, Pastor etc), and the big four – Santander, BBVA, La Caixa and Caja Madrid.

    The problem is that the mounting ocean of bad debt has broken now penetrated the first line of defence, that is all. And the government is begining the long road of soaking up the pain, till it no longer can. This time it is only 9 billion euros, it is what is to follow that should be putting people’s hair on end.

    As the regional cajas fold we will gradually move over to the second line of defence, and at that point it would be advisable to ask all women and children to seek safety in the old church (just in case).

    But if we fight with the same weapons, then we will lose the next round too.

    So then we will have to regroup in the old part of the city, and fight a last ditch stand, to try to hold the third line before that too falls, and the government treasury gets looted (sovereign default).

    So we may well end up resembling John Wayne and his friends in that old film that so fascinated me as a child, now what was it called?

    Oh yes, The Alamo.

    Naturally, it doesn’t have to be like this. There are still ways out, but for those to become “doable” we will need direct intervention at the EU level, and when they come down South, then they’d better come with their wallets full and the cheque book handy.

  3. Pingback: Etl World News | Spanish bank shares plunge

  4. Thanks. I had not found Spain Economy Watch. It is a real asset.

    I still disagree with your conclusions. My guess is that – conditional on demand expanding in the surplus countries – the Spanish economy will stsrt growing again in early 2010; without a general financial crisis but with the pattern of bank and Caja rescues and mergers that the Bank of Spain is now preparing for.

    I will try to find time to set our my thoughts at length on Spain Economy Watch.

  5. Hi Diversity,

    “I will try to find time to set our my thoughts at length on Spain Economy Watch.”

    I look forward. Any kind of rational discussion is welcome. Isn’t that what diversity is all about.

    “conditional on demand expanding in the surplus countries”

    Well this is a “strong” condition, and frankly I don’t think we will see it. Try Japan Economy Watch, and Claus’s post “engine failure”, and you may begin to see why I think this way.

    My guess is that the way out of this is a Marshall Plan type programme from the G20 to assist development in the developing world. But I think we may still be two or three years away from biting the bullet on this, es decir, I don’t expect to see them do much this weekend (politically too painful for them) and I do not see much in the way of recovery in 2010.

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