Spain Default Probability at 100% — To Take the Whole European Financial System Down

Graham Summers from Phoenix Capital provides the nice summary of how deep in trouble Spain is, and how the default of Spain — a 100% probable event — will bring the whole Europe and its banking system to its long overdue collapse:

The fact remains that the EU will break up in time. And it will likely be Spain that brings this about.
The reasons? Among other things:

1. Spain's private Debt to GDP is above 300%.
2. A huge portion of Spain's banking system (representing over 50% of mortgage loans AND deposits) was totally unregulated up until just a few years ago.
3. Spanish banks are drawing over €400 billion from the ECB on a monthly basis (up from €377 in June) to fund their liquidity needs.
4. Spanish banks are now net sellers of Spanish sovereign bonds (leaving the ECB as the only buyer in the market)
5. Spain's banking system has lost 18% of its deposits in the last 10 months due to a staggering bank run.
6. The economy of Spain is a disaster with total unemployment over 25% and youth unemployment above 50%.
7. Spain is now facing a constitutional crisis with various regions looking to secede if they don't receive bailouts from the Federal Government "without conditions."
8. Spanish banks need to roll over (meaning renew terms on) more than 20% of their bonds this year.

So Spain will suffer a collapse, most likely of its banking system resulting in a sovereign default (barring a bailout). When this happens, some €1 trillion+ worth of collateral (still rated AAA by EU banks) will be sucked out of the system.

CDS Protection Buyers Burnt Second Time by Corrupt ISDA — How Much Longer Until That Product and the Markets Around It Disappear?

Is the whole CDS market a game of chicken? And smoke & mirrors?

Buyers of CDS on the Greek government bonds had to fight against the ISDA which was claiming that the "voluntary hair-cut" creditors were getting was not a credit event, and now, the subordination of the sovereign debt of Spain seems to be falling under the same category. Who are these people kidding? Would you keep on buying insurance if every time you have an incident the insurer asked you to go and Zuck yourself? Well it seems like the path the CDS is on is a slippery slope and most likely the whole market will disappear during the deflation of the financial product Great Mania.

Via ZeroHedge:

And just as ISDA was starting to become somewhat credible again, we get this from Bloomberg:

• Spanish CDS Trigger Unlikely on Subordination, Says ISDA *Dow Jones

From Reuters:

Credit default swaps on Spain are unlikely to trigger as a result of the 100 billion euro bail-out of the country's banking system announced over the weekend, according to leading derivatives lawyers.

The European Stability Mechanism's senior creditor status has led to questions over whether a subordination credit event will be triggered upon Spain receiving loans from the permanent bailout fund. In contrast to the IMF's preferred creditor status, which is implicit rather than legally documented, the ESM's treaty actually specifies its seniority to other creditors - a clause that some analysts reckon could trigger CDS.

There have been subsequent reports that Spain's emergency loans may be funneled through the temporary bailout fund, the EFSF, before the ESM becomes into force in July to avoid a potential credit event. Such measures may prove unnecessary, though, as derivatives lawyers have cast doubt on the possibility of ESM rescue money triggering CDS.

"I can't see any basis on which this would constitute a subordination credit event as it doesn't change the terms of the claims held by the other creditors," said Simon Firth, a partner in the derivatives practice at Linklaters.

"It's actually impossible to have a restructuring credit event based subordination without something that affects the rights of existing bondholders. In the absence of some kind of agreement or change of law, then I don't see anything that will [do that]," said Firth.

Nigel Farage: The euro Titanic has now hit the iceberg

Very interesting speech from Nigel Farage earlier today at the European Parliament, available on YouTube. The interesting part is how this bailout of Spain will actually further weaken Italy, which is already on the brink of collapse and a confirmation of something we had previously discussed on this blog: a Greece default of Euro-exit would make the ECB bankrupt.

Here's the transcript, with my highlights:

"Another one bites the dust. Country number four, Spain, gets bailed out and we all of course know that it won't be the last. Though I wondered over the weekend whether perhaps I was missing something, because when the Spanish prime minister Mr Rajoy got up, he said that this bailout shows what a success the eurozone has been.

And I thought, well, having listened to him over the previous couple of weeks telling us that there would not be a bailout, I got the feeling after all his twists and turns he's just about the most incompetent leader in the whole of Europe, and that's saying something, because there is pretty stiff competition. 

Indeed, every single prediction of yours, Mr Barroso, has been wrong, and dear old Herman Van Rompuy, well he's done a runner hasn't he. Because the last time he was here, he told us we had turned the corner, that the euro crisis was over and he hasn't bothered to come back and see us. 

I remember being here ten years ago, hearing the launch of the Lisbon Agenda. We were told that with the euro, by 2010 we would have full employment and indeed that Europe would be the competitive and dynamic powerhouse of the world. By any objective criteria the Euro has failed, and in fact there is a looming, impending disaster. 

You know, this deal makes things worse not better. A hundred billion [euro] is put up for the Spanish banking system, and 20 per cent of that money has to come from Italy. And under the deal the Italians have to lend to the Spanish banks at 3 per cent but to get that money they have to borrow on the markets at 7 per cent. It's genius isn't it. It really is brilliant. 

So what we are doing with this package is we are actually driving countries like Italy towards needing to be bailed out themselves.

In addition to that, we put a further 10 per cent on Spanish national debt and I tell you, any banking analyst will tell you, 100 billion does not solve the Spanish banking problem, it would need to be more like 400 billion. 

And with Greece teetering on the edge of Euro withdrawal, the real elephant in the room is that once Greece leaves, the ECB, the European Central Bank is bust. It's gone. It has 444 billion euros worth of exposure to the bailed-out countries and to rectify that you'll need to have a cash call from Ireland, Spain, Portugal, Greece and Italy. You couldn't make it up could you! It is total and utter failure. This ship, the euro Titanic has now hit the iceberg and sadly there simply aren't enough life boats."

Summary Of the Bailout of Spanish Banks Creditors So Far — Massive Downside Risk Ahead

If the bailout and the lies of the political class came as a surprise to you, please read my two previous posts published back in May.

• 2012-05-14 — More Denial and Madness from Spain: Santander CEO Derides Surge in Spain Defaults and Spain Rules Out Bailout as De Guindos Says Banks Funded
• 2012-05-12 — Madness and Denial in Spain Lingers

Noteworthy news items:

• Spain Seeks EU’s Fourth Bailout With $125 Billion Request
• Live Webcast of the Bailout Announcement
• Eurogroup Statement
• Finland Wants Collateral for Spanish Bank Aid From EFSF
• Ireland wants rescue deal negotiated to match Spain's

My commentary

Spain is pretending that the loan is not a bailout, and not a rescue (who do they think they are fooling?). Moreover, it comes with supposedly no economic or fiscal conditions (that remains to be proven, since it seems like the Nordic countries want collateral, among other things). Finally, the bailout comes with more favorable terms than market terms, BUT there's a big BUT: the bonds are not only public debt, but apparently, they will be senior to the sovereign debt of Spain, meaning that the sovereign holders all of the sudden appear as secondary lenders, and far less secured than they were. This will put a massive pressure on the sovereign debt of Spain and by itself should be considered a credit event for CDS holders (to be confirmed). This should also trigger big credit downgrades of the sovereign bonds. I'm very curious to find out what will happen to the Spanish yields at market open. They should rise dramatically. 

Finally, if you think that this will stop the contagion think again: not only will this reopen the cases of  already bailed-out countries as they will undoubtedly seek to obtain the same terms as Spain, but it will further weaken the ability of the Eurozone countries to borrow as their debt levels rise to lend to the other insolvent ones, and also as those borrowing will see the new bonds to be senior to the sovereign bonds, making the risk of lending and hence the yields go higher.

Related quotes

Spain Seeks EU’s Fourth Bailout With $125 Billion Request

(Bloomberg) May 11, 2012 — Finland will demand collateral for its share of emergency loans to shore up the Spanish banking system should the money come from the euro-region’s temporary bailout fund, Finance Minister Jutta Urpilainen said. 

“It remains undecided whether the bailout will be granted via the temporary facility, in which case Finland will require collateral,” Urpilainen told reporters in Kokkola, Finland, yesterday. The other alternative is to grant the loan through the European Stability Mechanism, the “permanent crisis mechanism, which will provide better security for taxpayers” and won’t result in demands for extra guarantees, Urpilainen said. 

Bailout Key highlights:

• GUINDOS SAYS SPAIN WILL SEEK EUROPEAN BAILOUT FOR ITS BANKS
• GUINDOS SAYS CONSULTANTS' REPORTS TO BE PUBLISHED IN JUNE
• GUINDOS SAYS FROB WILL RECEIVE THE FUNDS     

On the conditionality:

• DE GUINDOS SAYS AID CARRIES NO MACRO-ECONOMIC, FISCAL CONDITION
• GUINDOS SAYS BANKS GETTING AID WILL FACE CONDITIONS
• IMF ONLY HAS ADVISORY, SUPPORT ROLE FOR SPAIN, DE GUINDOS SAYS

And the important stuff:

• GUINDOS SAYS THIS IS NOT A `RESCUE'  
• AID IS A LOAN IN VERY FAVORABLE TERMS, DE GUINDOS SAYS
• GUINDOS SAYS TERMS MORE FAVORABLE THAN MARKET RATES    

And the most important stuff:

• GUINDOS SAYS FROB'S DEBT COUNTS AS PUBLIC DEBT 

Eurogroup statement on Spain

The Eurogroup supports the efforts of the Spanish authorities to resolutely address the restructuring of its financial sector and it welcomes their intention to seek financial assistance from euro area Member States to this effect. 

The Eurogroup has been informed that the Spanish authorities will present a formal request shortly and is willing to respond favourably to such a request. 

The financial assistance would be provided by the EFSF/ESM for recapitalisation of financial institutions. The loan will be scaled to provide an effective backstop covering for all possible capital requirements estimated by the diagnostic exercise which the Spanish authorities have commissioned to the external evaluators and the international auditors. The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to EUR 100 billion in total. 

Following the formal request, an assessment should be provided by the Commission, in liaison with the ECB, EBA and the IMF, as well as a proposal for the necessary policy conditionality for the financial sector that shall accompany the assistance. 

The Eurogroup considers that the Fund for Orderly Bank Restructuring (F.R.O.B.), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned. The  Spanish government will retain the full responsibility of the financial assistance and will sign the MoU. 

The Eurogroup notes that Spain has already implemented significant fiscal and labour market reforms and measures to strengthen the capital base of the Spanish banks. The restructuring plans in line with EU state-aid rules and horizontal structural reforms of the domestic financial sector. 

We invite the IMF to support the implementation and monitoring of the financial assistance with regular reporting.

Finland Wants Collateral for Spanish Bank Aid From EFSF

(Bloomberg) May 11, 2012 — Spain became the fourth euro member to seek a bailout since the start of the region’s debt crisis more than two years ago with a request for as much as 100 billion euros ($125 billion) in loans to rescue its banking system.

[...] 

Economy Minister Luis De Guindos announced the aid request yesterday after a three-hour conference call with his European counterparts. He said the terms of the rescue loans are “very favorable” compared with market rates.

The funds will be channeled through Spain’s FROB bank rescue fund, and will add to Spain’s debt [...] 

The European aid for Spain’s banking industry will carry an interest rate of about 3 percent, El Pais reported today, citing people familiar with Spain’s negotiations with its European partners whom the newspaper didn’t identify by name.[...] 

The bailout adds to the 386 billion euros ($480 billion) in pledges to Greece, Ireland and Portugal that European governments and the International Monetary Fund have made since 2010.

So we're now at about 486 billions euros into the ditch, and that's only the beginning for Spain.

[...] The Spanish government’s credibility was jolted by the funding hole reported last month by Bankia Group, the third- biggest Spanish lender. The bank’s new managers went beyond the government’s provisioning rules and asked for a 19 billion-euro bailout. De Guindos had said two weeks earlier that 15 billion euros would be enough to meet the requirements of the second of two banking decrees he has drafted this year. 

“The Spanish problem was entirely avoidable,” said Thomas Mayer, an economic adviser to Deutsche Bank AG in Frankfurt. “When Bankia got into trouble and they had to inject another 19 billion, the market thought, well, they don’t know what they are doing.”

[...] Finland will also demand collateral for their share of the loans if the funds come from the temporary European Financial Stability Facility, Finance Minister Jutta Urpilainen told reporters yesterday. Ministers haven’t decided whether that fund or its permanent successor, the European Stability Mechanism, will be used, Urpilainen and de Guindos said. Should the ESM provide the funds, the loans would be senior to outstanding government debt, giving Spain’s EU lenders protection at the expense of bondholders. 

“Market reaction is unlikely to be favorable given that the bailout places even more strain on Spain’s creditworthiness, sets a precedent that the euro zone’s other bailed-out countries, in particular Ireland, are likely to object to, and risks putting pressure on Italy,” Nicholas Spiro, managing director at Spiro Sovereign Strategy, said in a note.

The highlighted sentences are of critical importance: basically, it will put a massive pressure on the sovereign debt of Spain. I'm very curious to find out what will happen to the Spanish yields at market open. They should rise dramatically. What kind of "bailout" would that be?

Rajoy, who said as recently as May 28 there would be no bailout for the nation’s lenders [...]

Well, Rajoy is a big fat liar as are ALL POLITICIANS. Is that news?

Ireland wants rescue deal negotiated to match Spain's

AFP - Ireland wants to renegotiate its rescue plan to benefit from the same treatment as Spain, which looks set to win a bailout for its banks without any broader economic reforms in return, European sources said on Saturday.
"Ireland raised two issues: one is the need to ensure parity of the deal with Spain retroactively on its bailout from EFSF," one European government source told AFP, referring to the temporary rescue fund, the European Financial Stability Facility.
Another European government source confirmed the information.

The Reason Why The European Leaders Trying So Hard to Keep Greece in the Eurozone

Nigel Farage has an eloquent speech about that:

Greece outside of the Eurozone may even be an inspiration for Portugal, Spain and many other countries.

There, you have it: the first reason, which we've mentioned many times here, is the belief that the whole banking sector of their respective country will collapse, and the second reason, is that the whole of the Euro might collapse, as countries start seeing the benefits of defaulting and leaving the single currency.

GRE Greece ETF Update and Charting the PIIGS Main Equity Indices [UPDATE]

The GRE Greece ETF is now trading at below 1.00€ (low of 0.985€) meaning that from the peak of about 14.00€, the drop has been more than 90%. One could wonder how much lower it can go.

Here's the details about the ETF, as captured from the French prospectus of the fund (click for larger image):

Conclusion: there's still room for further drop, as the banking sector still represents 33% of the index. 

[Update: initiated a small position on the ETF, bought at 0.985€ per share]

My friend SS has been kind enough to provide me on demand many charts and market data, and here's what he sent me on request yesternight: the charts of the main index of each of the PIIGS countries:

Greece: Top at 5346, currently trading at 553. This is a drop of 90%from peak. And it's a stock index of the 20 largest Greek capitalizations. 

Portugal: Top at 13729, currently trading at 4870. This is a drop of 65%. Same comment, this is the an index made of the largest companies in Portugal and my guess is that we're far from the bottom.

Ireland: Top at 10,000 bottom at 2,000 (drop of 80%) currently trading at 3,000. This is still a drop of 70% and my guess is that we're far from the bottom. 

Spain: Top at 16,000 currently trading at 6,500. This is a drop of 65%. My guess is that we're far from the bottom

Italy: Top of 44,000 currently trading at 13,000. This is a drop of 70%. And my guess is that we're far from the bottom

More Denial and Madness from Spain: Santander CEO Derides Surge in Spain Defaults and Spain Rules Out Bailout as De Guindos Says Banks Funded

This is a follow up to the post I wrote just a couple of days. Just listen to the completely unbelievable statements made from the CEO of Santander, one of the biggest banks in the world, which also happen to be a Spanish and most likely highly distressed one. He also makes the statement that "this place is different", one of the most dangerous sentences of the investment world:

April 27 (Bloomberg) — JPMorgan Chase & Co., the world’s largest bond underwriter, predicts that Spanish mortgage arrears will surge as unemployment rises. That’s also the view from the international debt market, which has driven up yields on Spain’s bonds in a bet the country will have to bail out banks. 

In Spain, Banco Santander SA Chief Executive Officer Alfredo Saenz said yesterday that’s nonsense. “Mortgages get paid in good times and in bad,” he said in a news conference at the bank’s headquarters outside Madrid. “Anyone raising this problem as one of the issues for the Spanish financial system is saying something stupid.”
[...] 

“There does seem to be a strange contrast between the high level of unemployment and the surprisingly low level of delinquencies on mortgages,” said Georg Grodzki, who helps oversee $515 billion as head of credit research at Legal & General Plc in London. “This raises the issue of whether loans have been amended to make them look current when in fact they are distressed.” 

The more than 600 billion euros ($792 billion) of outstanding home loans on the books of lenders may be the “next elephant” for Spain as unemployment spurs defaults, JPMorgan analysts including Roberto Henriques and Gareth Davies wrote in a report published April 26. Spain’s jobless rate rose to 24.4 percent in the first quarter, the highest level in 18 years, from 22.9 percent in the previous three months, the National Statistics Institute said today.
[...] 

Saenz said Spanish culture is part of the reason why default rates remain low.
[...]
“It’s a sociological thing and that’s how it is,” said Saenz.
Santander had 59.4 billion euros of loans made to Spanish households to buy homes at the end of 2011 out of a total loan book in Spain of about 200 billion euros. The default ratio was 2.6 percent in March, down from 2.7 percent at the end of 2011, the bank said. 

“The data is good so let’s not start debating the quality of the information,” said Saenz. “Mortgage arrears are not a problem and are not going to be a problem.”

Santander isn’t the only Spanish bank defending its mortgage loan quality.
People “tend to look at the negative side, the unemployed that we have here,” said Manuel Gonzalez Cid, chief financial officer of Banco Bilbao Vizcaya Argentaria SA, Spain’s second- biggest lender, in an April 25 webcast for analysts. “But we don’t look at all the people who are working, who are paying their mortgages and paying their loans in a very normal fashion.” 

Of BBVA’s 79 billion euros of residential mortgage loans in Spain, 2.37 billion euros, or 3 percent, were impaired at the end of 2011, according to the bank’s annual report.
[...] Based on Irish default levels, a similar trend in Spain would lead to losses of 59 billion euros for the banks there, according to the JPMorgan analysts. 

The picture is clouded by the increasing willingness of banks to change the terms of loans to help customers keep up loan payments. Bankia SA, Spain’s third-biggest bank, said April 24 that it’s making 110 changes to loan terms a day and that mortgages made up 45 percent of the 7,300 term adjustments it carried out in the first quarter. 

“Mortgages for individuals in all markets, including the U.S. and the U.K., normally are very resilient and resistant when the situation changes,” said Saenz. “That’s because mortgages get paid.” 

Has Saenz been living in a cave for the past 5 years?

And also: Spain Rules Out Bailout as De Guindos Says Banks Funded

April 27 (Bloomberg) -- Spanish Economy Minister Luis de Guindos ruled out seeking a bailout hours before Standard & Poor’s cut the country’s credit rating to three levels above junk and a report showed unemployment jumped close to a record. 

“Nobody has asked Spain, either officially or unofficially” to turn to Europe’s bailout mechanisms, he said in an interview in Madrid late yesterday. “We don’t need it.”

Spain to Intervene as Asturias' Local Government Refuses to Adopt Budget National Budget Commitments — 72,000 protesters took to the streets across Spain yesterday — Spain Will Miss Budget-Deficit Goals Through 2013

Some interesting news for a Sunday...

(Bloomberg) May 13, 2012 — Spain may intervene in the finances of the northern Spanish principality of Asturias because local politicians have failed to form a government that agrees on cuts to its budget deficit. 

“Asturias is especially worrying because the interim situation of the government impedes it from adopting revenues and expenses commitments,” said the Budget Ministry in a statement yesterday. The Spanish government may apply corrective measures or even takeover the region’s accounts, said the ministry. 

Asturias’s interim government, led by Francisco Alvarez- Cascos former Peoples Party minister, has been negotiating with other parties since March in an effort to form a coalition. Spain’s regions control more than a third of public spending and their deficit was almost twice their target last year at 2.9 percent of gross domestic product. That pushed the nation’s shortfall to 8.5 percent of GDP compared with a 6 percent European Union limit. 

Spain approved in March a new budget stability law allowing it to force all regions to comply with deficit reduction goals.

(Bloomberg) May 13, 2012 — Spanish police made 18 arrests, mostly for public order offences, in Madrid during protests repeated across the country over economic discontent, the Interior Ministry said.

Moves to dissolve the protest in Puerta del Sol, in downtown Madrid, ended earlier today, the ministry said. The deadline to end the protest had been 10 p.m. yesterday, Europa Press reported.

About 72,000 protesters took to the streets across Spain yesterday, including 30,000 in Barcelona and 22,000 in Madrid, the Associated Press said, citing police. There were other protests in Bilbao, Malaga and Seville, AP reported.

The protests commemorated the anniversary of last year’s demonstrations against youth unemployment and the handling of the international financial crisis.

(Bloomberg) May 11, 2012 — Spain will miss its budget-deficit target this year and rack up a shortfall that is more than double its goal in 2013 as unemployment exceeds 25 percent, the European Commission said.

Spain’s overall budget deficit will amount to 6.4 percent of gross domestic product this year and 6.3 percent in 2013, missing the targets of 5.3 percent and 3 percent respectively, the Commission said in its spring forecasts today in Brussels. It sees the economy contracting 0.3 percent in 2013, a more pessimistic view than the government’s, pushing unemployment to 25.1 percent. 

Spain is implementing the deepest austerity measures in at least three decades including tax increases and savings in health and education. Concerns over Spain’s deficit and the government’s ability to overhaul lenders without overburdening public finances have helped reignite the sovereign debt crisis, sending Spanish 10-year borrowing costs to more than 6 percent.

Madness and Denial in Spain Lingers

Below are some quotes from a couple of interesting Bloomberg report. The key points I would like to highlight, in addition to the madness of the crowds is how the government and central planning crated the bubble. In a free market, the bubble would never reach such levels, and would bust naturally due to the lack of funding:

• Credit wasn’t a problem, the banks were throwing money at people. Comment: Yes, this is due to the fact that the Governments have created Central Banks which control the availability of credit, and they have also made it lawful for banks to create money out of nothing, with the fractional reserve banking, which allows banks to lend as much as 30, 40, or 50 times as much as they could without this law.
• More obviously: Both booms also were fueled by incentives. In Ireland, the government gave investors tax breaks to build in certain areas, and granted homeowners breaks on their interest payments. In Spain, there were incentives for municipalities to approve land for development because they could keep 10 percent of all the land they reclassified.
• The former Irish Minister couldn't say it better: “You could say the government was drunk on the revenue that was coming from all the construction taxes.”
• The regulators failed at their job, including every single Central Bank. Yet, pro-Central Planning people will say they need more power and more staff. 

(Bloomberg) May 10, 2012 — Spain is underestimating potential losses by its banks, ignoring the cost of souring residential mortgages, as it seeks to avoid an international rescue like the one Ireland needed to shore up its financial system. 

The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. That’s enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn’t be anything left for defaults on more than 1.4 trillion euros of home loans and corporate debt. 

Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal. 

“How can you only talk about one type of real estate lending when more and more loans are going bad everywhere in the economy?” said Patrick Lee, a London-based analyst covering Spanish banks for Royal Bank of Canada. “Ireland managed to turn its situation around after recognizing losses much more aggressively and thus needed a bailout. I don’t see how Spain can do it without outside support.” 

Spain, which yesterday took over Bankia SA, the nation’s third-largest lender, is mired in a double-dip recession that has driven unemployment above 24 percent and government borrowing costs to the highest level since the country adopted the euro. Investors are concerned that the Mediterranean nation, Europe’s fifth-largest economy with a banking system six times bigger than Ireland’s, may be too big to save. 

[...] Spain’s banks face bigger risks than the government has acknowledged, even with lower default rates than Ireland experienced. If losses reach 5 percent of mortgages held by Spanish lenders, 8 percent of loans to small companies, 1.5 percent of those to larger firms and half the debt to developers, the cost will be about 250 billion euros. That’s three times the 86 billion euros Irish domestic banks bailed out by their government have lost as real estate prices tumbled. 

Moody’s Investors Service, a credit-ratings firm, said it expects Spanish bank losses of as much as 306 billion euros. The Centre for European Policy Studies said the figure could be as high as 380 billion euros. 

At the Bankia group, the lender formed in 2010 from a merger of seven savings banks, about half the 38 billion euros of real estate development loans held at the end of last year were classified as “doubtful” or at risk of becoming so, according to the company’s annual report. Bad loans across the Valencia-based group, which has the biggest Spanish asset base, reached 8.7 percent in December, and the firm renegotiated almost 10 billion euros of assets in 2011, about 5 percent of its loan book, to prevent them from defaulting. 

The government, which came to power in December, announced yesterday that it will take control of Bankia with a 45 percent stake by converting 4.5 billion euros of preferred shares into ordinary stock. The central bank said the lender needs to present a stronger cleanup plan and “consider the contribution of public funds” to help with that.

The Bank of Spain has lost its prestige for failing to supervise banks sufficiently, said Josep Duran i Lleida, leader of Catalan party Convergencia i Unio, which often backs Prime Minister Mariano Rajoy’s government. Governor Miguel Angel Fernandez Ordonez doesn’t need to resign at this point because his term expires in July, Duran said. 

Spanish banks have “a 1.7 trillion-euro loan book, one of the world’s largest, and they haven’t even started marking it,” Hesse said. “The housing bubble was twice the size of the U.S. in terms of peak prices versus 1990 prices. It’s huge. And there’s no way out for Spain.”
[...] The losses of bailed-out domestic banks in Ireland have reached 21 percent of their total loans. Spanish banks have reserved for 6 percent of their lending books. 

[...] Developers are still building new houses around the country, even with 2 million vacant homes.[...] In Spain, a bank can go after other assets of the borrower, who remains on the hook for the debt no matter what the price of the house when sold. Still, the same extended liability didn’t stop the Irish from defaulting on home loans as the economy contracted, incomes fell and unemployment rose to 14 percent.

(Bloomberg) May 2, 2012 — From atop the stone walls of Avila, Spain, a medieval city an hour’s drive northwest of Madrid, beyond the parking lots and empty playgrounds and thousands of vacant new apartments, a construction crane can be seen moving on the horizon as building continues. 

“Avila isn’t an exception,” said Jesus Encinar, co- founder of Madrid-based Idealista, Spain’s largest property website, and an Avila native. “It’s a small-scale example of the madness that gripped the whole real estate industry.” 

In the stages of death of a real estate boom, Spain is still in denial. [...] Spain, Europe’s fifth-largest economy, is the current focus of attempts to contain the region’s sovereign debt crisis, as Prime Minister Mariano Rajoy struggles to quell speculation it will need a bailout. Developers are showing similar optimism. They continue to build even with 2 million homes vacant around the country, new airports that never saw a single flight being mothballed, and property appraisers and banks reporting values have fallen only about 22 percent, said Encinar, who estimates the real decline is probably at least twice that. 

[...] On the plain below the central walled city of Avila, a world heritage site and a popular tourist destination, the province with a population of 171,680 has about 19,000 apartments and villas empty or unfinished, according to Borja Mateo, the author of “The Truth About the Spanish Real Estate Market.” 

Ministry of Infrastructure figures show 23,419 homes were constructed in the decade through 2007, with another 11,000 homes built there since 2008. The sprawling developments are dotted with thousands of empty parking spaces, while streets have makeshift barriers where the money has run out, others simply end in fields. 

Miguel Angel Garcia Nieto, mayor of Avila for the past decade, disagrees that his city has been overbuilt. 

“When we approved the first urban plan back in 1998 there was an unprecedented demand for homes,” Nieto said in a telephone interview on April 19. “Yes, there is oversupply at the moment because of the financial crisis and everyone’s gone back home to live with their parents, but it’s not because there is lack of demand. When the economy gets back on track I am confident the supply will be absorbed.” 

That may take decades, said Encinar, after Spain’s jobless rate rose to 24.4 percent in the first quarter, the highest in almost two decades and the economy is mired in a recession that the International Monetary Fund predicts will cause it to shrink by 1.8 percent in 2012. 

The Spanish real estate bust is the biggest test to date for European authorities with Spain’s economy almost twice that of Greece, Portugal and Ireland combined. Yields on Spain’s 10- year bonds climbed nine basis points to 5.86 percent from April, approaching the level of those countries when they had to be bailed out. 

[...] In 2009, Ireland created the National Asset Management Agency, or NAMA, a so-called bad bank. It used bonds to buy commercial real estate loans from the banks with a face value of 74 billion euros for 32 billion euros. That left banks needing capital, leading the state to pour in cash and nationalize five of the six biggest lenders. 

[...] “The big knock to the domestic economy was the fact that building and construction totally collapsed and that was over 20 percent of the economy and it was bang, gone completely,’” Finance Minister Michael Noonan said in a speech to a Parliamentary committee on April 25.[...] In the 1970s and 1980s, Spain and Ireland were among the poorest countries in Europe. Following the creation of the euro, both tapped into international money to fuel the growth in their real estate markets. 

Prices doubled in Spain in the decade through 2007. Irish house prices more than quadrupled from 1995 to 2005 to an average of 303,247 euros, the fastest growth among 18 countries surveyed by the Paris-based Organization for Economic Cooperation and Development. 

“It was avarice,” said James Nugent, managing director of Dublin-based real-estate broker Lisney. “You just had to get as much of it as you could possibly get your hands on. Credit wasn’t a problem, the banks were throwing money at people.”

Former Irish Minister Tom Parlon recalls putting a 2.1 acre site of the state’s veterinary college in Dublin’s embassy belt of Ballsbridge up for sale in 2005. “We thought in our wildest dreams that maybe it might make 100 million euros, which was a crazy price,” he said. “When the bids were opened there was a bid of 171 million euros and the developer was backed up by one of our main banks. That was just a flavor of the madness.” 

The site is currently being used by a local luxury car dealer, MSL Ballsbridge Motors, to store vehicles, mainly Daimler AG’s Mercedes-Benz models. 

On the northern outskirts of Madrid, near Barajas airport and the Real Madrid soccer team’s training ground, is Valdebebas, a development project under construction covering more than 10.6 million square meters of space. About 5,400 of the planned 12,500 homes have been built and another 2,100 are under construction, according to a spokesman for the project who declined to be identified by name, citing company policy. The development, which belongs to private land owners who pooled their property, is backed by banks including Banco Bilbao Vizcaya Argentaria SA and Aareal Bank AG. (ARL) There are bus tours on Saturday for potential buyers, and an open house of the model homes every Sunday. 

“In Spain, there seemed to be an effort to smooth out the pace of activity rather than face the shock, as Ireland did,” said Alcidi. “That means the adjustment is going to take much longer in Spain.” 

At the height of their respective real estate booms, construction accounted for more than 20 percent of the economies of both Spain and Ireland. In Spain, the figure is now about 14 percent, according to Alcidi. In Ireland, the figure is just 5 percent. 

Both booms also were fueled by [Government] incentives. In Ireland, the government gave investors tax breaks to build in certain areas, and granted homeowners breaks on their interest payments. In Spain, there were incentives for municipalities to approve land for development because they could keep 10 percent of all the land they reclassified. The towns would get revenue from the developments and they could use the land they acquired as collateral for loans, said Encinar. 

About 230,000, or about two-thirds, of Irish construction jobs have gone since 2007. Home building will hit an all time low this year, with just 1 house per 1,000 people being built, compared with 15 in the 2000s, according to the Society of Chartered Surveyors Ireland. 

“It was a mania,” said Parlon, the former Irish government minister who now heads the Construction Industry Federation. “You could say the government was drunk on the revenue that was coming from all the construction taxes.” 

[...] In all, about 15 percent of Irish homes were vacant in 2011, the country’s statistics office. About 20 percent of office space in Dublin is vacant. 

[...] “It took 20 centuries for the center of Avila to be developed, and in the last 10 years they’ve developed twice that amount,” said Natalio Encinar, a brother of Jesus Encinar who still lives in Avila. Until demand collapsed, “the main industry here was building houses. And plumbers made more than engineers.”

And a few links from Mish, in chronological order:

• Hopeless Situation in Spain: New Wave of Defaults as Home Prices Crash; Bad Loans Highest Since Oct '94
• Eight of Ten Largest Stocks in Spanish Ibex Index Below Liquidation Value; Madrid Rejects Regional Budgets Representing 32.5% of GDP; Treasury Warns of "Immediate" Intervention
• Spain Long-Term Debt Lowered to BBB+ from A, With Negative Outlook; 100% Certain Conditions in Spain Worsen
• Depression in Spain: Unemployment Rate Up .5 Percentage Points to 23.6%; Expect Much Higher Rates Later This Year; When is the Breaking Point?
• Bank of Spain Confirms Foreigners Dump Spanish Bonds; Spanish Banks Foolishly Load Up
• Spain to Spend €7bn-€10bn (It Doesn't Have), Bailing Out Bankia, the Nation's 3rd Largest Bank
• Top Tweet in Spain "Do as Iceland Did"
• Audit Shows Spain's Bankia Short 3.5 Billion Euros; PP says "We Must Help Bankia, It Has Deposits for 10% of GDP"
• Spain Nationalizes BFA and 45% of Bankia; No Bid for CatalunyaCaixa, Bank Worth Less Than Zero; Der Spiegel: Germany Fears "Bottomless Pit"

Luxury Southern European Villas Prices Down 30% to 50% From Peak

The WSJ reports:

Spain, Portugal, Greece and, to a lesser extent, Italy, all immersed in the European debt crisis, are experiencing second-home property price declines. The countries' housing markets have been battered by escalating debts, recent austerity measures and deep uncertainty in the financial markets. A glut of new homes built in boom times in many popular vacation areas is making matters worse, as rental demand falls and financing requirements become stiffer. As a result, asking prices for second homes have fallen 15% to 30% in recent months. In less fashionable areas, prices for some properties are as much as half off what they were two years ago. 

"Price expectations have finally adjusted to the new reality. People are finally accepting that the game has changed," says Joachim Wrang Widen, director of Christie's International Real Estate in Europe.

Obviously, perma-bull talking heads and journalists present these facts with a bullish and positive view: it's time to buy! And you'll find many "investors" story about how great the opportunity is, once the price has been slashed by 18%. Do not listen to these! Fortunes will be wiped out before we hit the real bottom, somewhere 70 to 90% lower than where we are today.

It took a long time for the shift in mentally to happen, but things will go accelerating from here. Denial is about to end in these countries, and losses to be realized. In which cases, the banking sector, already against the wall, might finally collapse.