The EU rescue efforts for Spanish banks are deemed insufficient by QNB Group for three key reasons: 1) Spanish banks still have large amounts of toxic assets left over from a burst property bubble that is weighing on them. 2) Planned EU measures to provide up to €100 billion in funds to Spanish banks may not be enough, as the banking system is very large relative to Spain's economy at over three times GDP. 3) The weak Spanish economy and housing market continue to deteriorate, along with high unemployment, large government debt, and fiscal deficit, making the banking system's revival dependent on more efforts to restart economic growth.

1. QNB Economics
economics@qnb.com.qa
Rescue Efforts to Spanish Banks Deemed Insufficient
In spite of a recent breakthrough decision by the EU to Spanish banks are still reeling under the pressure of
boost their support for Spanish banks, QNB Group toxic assets that have mainly been left over from a
argues that planned measures may not be sufficient. property bubble that burst four years ago. Household
Clarity on the bailout terms and a revival in the ownership increased substantially over the last decade,
Spanish economy would be needed to put the banks on to reach over 75%, partly as a result of changing tax
firmer ground, according to QNB Group. regulations which encouraged home ownership.
Mortgage related lending is estimated to have reached
The net borrowing of Spanish banks from the €627bn by the end of 2011.
European Central Bank (ECB) reached a record level
of €337bn in June 2012, a seven-fold increase The IMF reported recently that the Spanish banking
compared to the year before. This excess originates sector’s non performing loans (NPLs) ratio increased
primarily from the ECB’s decision to offer €1.1trn in from 0.9% in 2007 to 7.6% in 2011, when they totalled
two tranches during December 2011 and February €136bn of all loans. The construction and property
2012 to Euro-area banks at very low rates (1%). sector accounts for 72% of this amount.
ECB Loans to Spain and CDS Spreads The EU bailout of the banking sector will come from
the Eurozone’s European Financial Stability Facility
Net ECB Loans to Spanish Banks (Euro bn) (EFSF), of which €30 bn has already been approved in
Spanish 5-yr CDS Spreads (bps) June. Three further payments, totalling €45 bn, are
German 5-Yr CDS Spreads (bps) expected to be disbursed over the next year, as the
individual banks recapitalisation plans are presented
ECB offer of €1.1trn to
350
banks in Dec and Feb
337.2 900 and assessed. A final €25 bn would be made available
to buy up difficult to sell debt.
300 287.8
750
In spite of all these measures, markets and rating
250 227.6
599 agencies have remained unconvinced, suggesting that
554 600
the rescue efforts were seen as inadequate. The spreads
200 476 on Spanish government 5-year credit default swaps
526
407
152.4 450 (CDS), a way of insuring debt against default, hit a
357
150 high of 599 bps in May. Even after the latest bailout
118.9
261 300 announcements, it was still as high as 554 bps on July
100 13. A related market signal was the yield on 10-year
69.9 76.0
47.8 112 150
government bond, which recorded a high above 7% in
50 98 85 102 83
79 July. The heightened risk is reflected by credit ratings
41
changes. On June 26th, on the eve of the EU summit,
0 0
Moody’s downgraded both the Spanish government
Jul 12*
Apr 12
Aug 11
Jun 11
Jun 12
Oct 11
Dec 11
Feb 12
debt and 28 banks.
One of the main reasons behind the negative market
*As at July 13th, 2012 reactions is the fact that the banking system is large in
Source: Bank of Spain, Bloomberg and QNB Group analysis both absolute and relative terms, with assets of over €3
trn, more than triple Spain’s GDP.
However, this injection of cheap funding proved to be
insufficient. As a result, on June 9th, the EU offered up New regulatory measures will require Spanish banks
to €100bn in additional support. Then on June 29th , it to raise loan loss provisions from the current 7% to
went further by agreeing to provide these funds 30%, which in itself will result in a projected €30 bn
directly to the banks, rather than via the already debt- funding gap in banks’ balance sheets. Furthermore,
ladden Spanish government. These rescue plans are Spanish banks’ have an estimated €600 bn in bonds
just the beginning, according to QNB Group, as that need to roll over in 2012. The prospects for takers
Spanish banks engage themselves in a long drawn seem weak and the costs for servicing the debt are
process to clean up their balance sheets. increasing.
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2. QNB Economics
economics@qnb.com.qa
Total Banking Sector Assets to GDP (2011)
481% (Total Assets as % of GDP)
472%
342%
320%
222%
124%
110%
98%
71%
70%
US
Germany
Saudi
UK
Singapore
UAE
Kuwait
Oman
Qatar
Spain
Source: Central Banks, IMF and QNB Group analysis
Aggravating the conditions in the banking sector is the
weak economic and fiscal environment. The Spanish
housing market continues to collapse, with the recent
Housing Index reading a decline by 8.3% year-on-year
as at June 2012. Along with this is high unemployment
at 24%, a debt-to-GDP ratio at over 140%, and a fiscal
deficit at 8.5% of GDP. Under such circumstances, the
markets are fair in assessing that much more is needed
than is currently on offer to improve the prospects for
the banking system. QNB Group sees more efforts by
the government in getting the economy back on a
growth trajectory as a key driver to reverse the current
banking system malaise.
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