A Better Way to Save Spain’s Banks

Juan Ramón Rallo, profesor de ISEAD Business School ha publicado un artículo de opinión que también aparece en la edición impresa del periódico “The Wall Street Journal” sobre su punto de vista respecto a  la situación actual que están viviendo los bancos españoles.

Far from calming the markets, Spain’s request for a €100 billion loan to bail out its banks has sent Spanish interest rates soaring and led to multiple downgrades from the credit-rating agencies this week.

There’s no question that the Spanish banking sector faces huge problems, thanks to its high exposure to a housing and real-estate market that continues to decline after a massive boom. But the Spanish state, with its own deficits and official unemployment of 25%, cannot afford to save the banks, even with the help of a soft loan from Brussels. This is the clear message from the markets at least.

Fortunately, there is a better solution for Spain’s banks: Instead of a bailout, the Spanish state should force a “bail-in,” in which all of the banks’ subordinated debt and some of its senior unsecured debt is converted to equity. This would reduce the banks leverage and increase the capital available to absorb the coming losses.

First of all, consider the grim fact that even €100 billion may not be enough to put Spain’s banks back on their feet, as they could easily face losses of perhaps three times that amount: Real-estate loans amount to €298 billion, construction credits to €98 billion, mortgages to €656 billion and other loans for families and firms to €683 billion. Assuming a 50% loss in real-estate and construction loans, a 5% loss in mortgages and a 10% loss in other credits to the national private sector, brings us quickly to the worrying figure of €300 billion in losses. And don’t forget the banks’ additional exposure of €78 billion to Portugal and €10 billion to Greece and Ireland, which could add losses of between €40 billion or more to our calculation.

Spanish banks currently report total equity of €377 billion, so losses on this scale would leave them with just €50 billion to €70 billion in remaining equity. To bring them back to reasonable levels of capital would then require €150 billion to €170 billion—well above the €100 billion line of credit that the EU plans to offer. Thus, even if the Spanish government chose to borrow the full amount on offer, national banks would still be undercapitalized by an amount equivalent to two or three years of their pre-provision operating profits. Sigue leyendo