Monday, 24 May 2010 07:30

As We Have Warned, the Fissures Are Widening in the Spanish Banking System

As of 6:40 am, US futures are down 15 points, with the MSM blaming the nationalization of the Spanish bank CajaSur.

The Bank of Spain seized troubled CajaSur with 500 million euro ($624 million) in funding to keep it solvent. The move pushed the Euro lower and left investors concerned about the country’s fiscal health.

The nationalization comes at a time of rising concerns over Spanish credit-worthiness, despite the European Union's decision earlier this month to put together a safety net for distressed European economies.

On Sunday, Spanish Prime Minister Jose Luis Rodriquez Zapatero told a group of socialist mayors, "No one can doubt at any time that Spain is a strong country and an economic power that will meet its obligations and pay debts." CajaSur's failure is the second in Spain since the start of the global financial crisis.

The bank -- based in the southern city of Cordoba -- has 13 billion euros ($16.35 billion) in loans and holds 0.6 percent of the total assets in the Spanish financial system.

I have made our position on Spain clear through a complete forensic review of the state's finances for subscribers:

File Icon Spain public finances projections_033010. An excerpt from this subscription document (subscribers, reference page 2) shows the euphoric, yet highly unrealistic optimism upon which Spain has built its fiscal austerity projections.

spain finances excerpt

As suggested in the document, if one refers to the blog post Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!, you will find that not only has Spain apparently fabricated a fairy tale of potential prosperity based upon the projections of the IMF and EC, but the IMF and EC have been nothing but fairy tale projections themselves.

I have been bearish on the Spanish banking system since January of 2009 (reference Reggie Middleton on the New Global Macro - the Forensic Analysis of a Spanish Bank ), and after a trip to the Costa del Sol by way of Málaga during the boom times are shortly thereafter, the reasons should be most obvious.

We now have a rash of new Spanish bank and sovereign research which has returned between 300% and 400% over the last few months.

std opt. research time purchase

Needless to say, as the situation in the EU deteriorates upon the widespread dissemination of the knowledge that BoomBustBloggers have been trading off of for quarters now, I feel the options will spike in value significantly!

I invite those who don't subscribe to BoomBustBlog to please be sure to peruse our entire collection of free analysis on the Pan-European Sovereign Debt Crisis.

Subscribers should review the ample Spanish research we have amassed on the crisis, its origins and opportunities avaiable:

Please be sure to peruse our entire collection of free analysis on the Pan-European Sovereign Debt Crisis.

Last modified on Wednesday, 26 May 2010 03:10


  • Comment Link Reggie Middleton Tuesday, 01 June 2010 11:48 posted by Reggie Middleton

    And the dominoes get to fallin' in Spain, right on cue:

    MADRID (MarketWatch) -- The stream of negative news from Spain's savings bank sector continued on Tuesday, with a report that the second largest player, Caja Madrid, will tap the government for 3 billion euros ($3.6 billion) of rescue funds.

    A spokesperson for Caja Madrid said the report that appeared in several Spanish newspapers saying it will ask for funds from the government's rescue fund was "speculation."

    The savings bank said last Friday it was in talks to merge with several regional cajas -- Caja de Avila, Caja Insular de Canarias, Caixa Laietana, Caja Segovia and Caja Rioja.

    More bad news emerged for Caja Madrid when Standard & Poor's placed its A/A-1 long and short-term ratings on the savings bank on CreditWatch negative, saying it expects "pronounced pressure" on its operating profit this year and into 2011.

    The negative status reflects the possibility of lowering counterparty credit ratings on Caja Madrid, though S&P said any downgrade is unlikely to exceed one notch. It's standalone credit profile and its hybrid securities could suffer a downgrade by one or more notches, warned the ratings agency.

    S&P said Caja Madrid, Spain's fourth-largest banking group by total assets, will be closely monitored over the next 18 months to evaluate the magnitude of expected deterioration.

    Downgraded on Tuesday was Spanish bank Banco Sabadell, the nation's sixth-largest group by total assets.

    Fitch Ratings, who downgraded Spanish sovereign debt last Friday, cut its long-term debt rating on Sabadell to A from A+.

    Fitch also downgraded Caja de Ahorros del Mediterraneo's long-term debt to BBB+ from A- with a negative outlook, and Banco de Valencia and Bancaja each to BBB from BBB+ with stable outlooks.

    Caja de Ahorros del Mediterraneo is Spain's only publicly traded savings bank. Those shares /quotes/comstock/06x!ccam (ES:CAM 5.90, 0.00, 0.00%) were down 0.2% in Madrid.

    It wasn't all bad for Sabadell, whose shares were down 3.6% amid weaker Spanish and European markets overall from nearly the start of trading.

    Fitch praised its "good domestic retail franchise, particularly with small to medium-sized enterprises, as well as its track record of sound pre-impairment operating profit, good cost efficiency and an improvement in regulatory capital."

  • Comment Link Reggie Middleton Friday, 28 May 2010 13:47 posted by Reggie Middleton

    The links work.

  • Comment Link YAYANKEE Friday, 28 May 2010 13:15 posted by YAYANKEE

    neither of my two responses with links work - so please remove.


  • Comment Link YAYANKEE Friday, 28 May 2010 13:14 posted by YAYANKEE

    Fitch Ratings downgraded Spain's long-term foreign and local currency issuer default ratings to AA+ from AAA with a stable outlook. U.S. stocks, which had languished for much of the morning, slid after the downgrade resurrected concerns about the euro zone in the last session of the market's worst month since February 2009. The move also weighed on the euro and sent investors into gold and U.S. Treasurys.

    "The downgrade reflects Fitch's assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term," said Brian Coulton, the head of EMEA sovereign ratings, in a statement.

  • Comment Link YAYANKEE Friday, 28 May 2010 13:02 posted by YAYANKEE


  • Comment Link YAYANKEE Wednesday, 26 May 2010 16:16 posted by YAYANKEE

    Reg, and comments on this Zero Hedge piece?

  • Comment Link YAYANKEE Wednesday, 26 May 2010 10:02 posted by YAYANKEE

    Bravo Reggie!

    Europe-Bank Lenders? Coalition of Unwilling
    Few Step Up to Risk Their Money for Long; New SEC Rule Makes Money Funds Even Less Interested


    Lenders to the major European banks are growing increasingly cautious, demanding higher rates for shorter periods, adding further stress to an already fragile financial system.

    Worries about sovereign debt have caused banks and other investors to pare risk. At the same time, new restrictions on money-market funds, which are big lenders to the banks, are forcing them to pull back on their lending.

    This funding squeeze has already contributed to the recent sharp declines in stock, commodity and corporate bond prices around the world. Unchecked, it threatens a repeat of the sort of contagion that gripped credit markets in 2008.

    To avoid such an outcome, the Fed may consider reducing the interest rate it charges on U.S. dollar loans it extends to the European Central Bank. The ECB in turn could ease terms on its loans to European banks.

    The London Interbank Offered Rate, which tracks the amount banks charge each other to borrow, rose on Tuesday to 0.53625, a 10-month high. The Libor increase is a key sign of banks' wariness.

    Lending rates in the commercial-paper market, where banks and other companies get short-term funding, followed suit. European 30-day commercial-paper rates for top-tier borrowers rose on Tuesday to 0.48%, the highest since last November, according to Tim Backshall, chief strategist at Credit Derivatives Research, up from about 0.3% at the beginning of April.

    Spain's Banco Bilbao Vizcaya Argentaria, or BBVA, has been unable to renew roughly $1 billion of short-term funding in the U.S. commercial-paper market since the beginning of the month, according to people familiar with the matter. The bank still has substantial European-based funding and deposits and about $9 billion in U.S. commercial paper.

    With investors increasingly finicky about credit risk, the range of interest rates European banks are paying for three-month commercial paper is three to four times wider than usual, according to Amitabh Arora, head of U.S. rates strategy at Citigroup Inc. Ordinarily, the rates paid by issuers of commercial paper vary by 0.15 to 0.2 percentage point. This week, he said, the variation is more like 0.6 to 0.7 point.

    Investors are also "unwilling" to lend for more than one month without being compensated more than usual, Citi's Mr. Arora said. Libor rates are 0.35% for one month, but 0.54% for three months and 0.76% for six months.

    During the past few weeks, several U.S. banks and money managers said they have reduced their lending to European borrowers.

    "Obviously with conditions in the euro-zone as they are, people will be responsive," said David Glocke, manager of $150 billion in taxable money-market fund assets for Vanguard Group. "We've taken a second and third look at our exposures over there and adjusted our portfolio where appropriate."

    U.S. money-market fund managers, which combined have some $3 trillion in assets, aren't necessarily selling European debt. But given their importance in the market for short-term corporate lending, only modest changes in buying behavior can lead to market upheavals.

    Money-market fund managers try to buy relatively safe assets and hold them for a short time. A money-market panic in 2008 contributed to the broader squeeze in corporate credit.

    European banks, too, are increasingly nervous about loans to each other. Spain's two largest lenders, Grupo Santander SA and BBVA, Grupo Santander recently boosted the amount of funds they're stashing overnight at the ECB, preferring to park their money somewhere risk-free rather than lend it to competitors.

    In an effort to prevent another such crisis, the Securities and Exchange Commission is requiring money funds to hold more-liquid and higher-quality assets, effective Friday.

    The new rules will shorten the maximum weighted average maturity of a fund's portfolio to 60 days from 90 days. Funds also will have to maintain a minimum of 10% of assets in securities that mature in one day and 30% in securities that mature in one week.

    That means funds will have less appetite for longer-term commercial paper, pushing up the rates banks must pay to borrow at longer maturities.

    This development comes at a particularly bad time for banks, with regulators pushing them to borrow at longer rates, to reduce their reliance on short-term financing sources and avoid blow-ups.

    Borrowing costs are still well below their levels at the worst of the 2008 crisis. But short-term funding pressures were a key component of that crisis and can feed on themselves if unchecked. The situation has parallels to 2008, when the collapse of Lehman Brothers caused markets to freeze around the world.

    A major contraction of bank funding could have far-reaching consequences. Libor is a benchmark for interest rates for trillions of dollars of debt from mortgages to credit cards and corporate loans. Its steady rise will push borrowing costs higher just as economies in the U.S., U.K. and elsewhere are showing tentative signs of a recovery.

    Meantime, Treasurers at U.S. companies are telling money-market managers to stay out of troubled sovereigns such as Spain, according to a person familiar with the markets.

    Some large U.S. banks, meanwhile, also have scaled back their short-term lending to European banks, especially to those in Greece, Spain and Italy, according to executives, bankers and traders in the U.S. and Europe.

    European banks, too, are increasingly nervous about loans to each other.

    Spain's two largest lenders, Grupo Santander SA and BBVA, recently boosted the amount of funds they're stashing overnight at the ECB, preferring to park their money somewhere risk-free rather than lend it to competitors.

    The ECB reported Tuesday that its overnight deposits rose to €264 billion ($324 billion), up from €253 billion Monday. That's below the €290 billion that was parked at the ECB at one point earlier this month, but up sharply from €200 billion in mid-March.
    —Jon Hilsenrath, Randall Smith and Carrick Mollenkamp contributed to this article.

    Write to Mark Gongloff at and David Enrich at

  • Comment Link vtholay Tuesday, 25 May 2010 08:16 posted by vtholay

    Thank you Matto. I am a big fan of Steve Keen's blog. I wasn't aware of the other blog that you mentioned. Will definitely take a look at it..

  • Comment Link Matto Tuesday, 25 May 2010 03:23 posted by Matto

    Vtholay, if you need a little bit of background on aussie banks/economy you might find some info here:


    this might tide you over till reggie gets a chance to look under the hood.

    Note -the aussie banks are seriously exposed to a housing slowdown, CBA and WBC in particular. All of our economy is leveraged on a continuing strong commodities boom.

    Im kind of stuck with a property or two myself and have been looking at puts on these guys as a hedge. Only problem if you are a foreign investor is you'll be buying them in AUD as there isnt an aussie bank with ADRs in the US.

  • Comment Link Reggie Middleton Tuesday, 25 May 2010 02:21 posted by Reggie Middleton

    I may.

  • Comment Link vtholay Tuesday, 25 May 2010 01:23 posted by vtholay

    As an aside, do you plan to look at the australian banking system as well?

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