Spain is leaking capital. Data from the Bank of Spain released yesterday showed that almost €100bn has left the country in the first three months of the year (chart from El Pais):
Analysts were forced into cliché to explain the record outflows. From the FT:
“My concern is that we haven’t yet seen the most recent numbers, which could be far worse,” said Raj Badiani, an economist at IHS Global Insight. “We are seeing a perfect storm.”
However, it should be remembered that Wednesday’s M3 figures showed no clear signs of intensifying deposit flight out of Spain. From JP Morgan’s Greg Fuzesi (with our emphasis):
In the M3 data through to April, Spanish bank deposits from the nonbank private sector continued to decline. The fall in 1Q12 was €23bn, while April’s €32bn drop was partly due to the volatile nonbank financial intermediaries, rather than just households and/or corporates. As we noted, declines in bank deposits do not necessarily reflect deposit flight caused by concerns about the domestic banking system. They can also reflect deleveraging (repayments of household and corporate debt), use of savings for spending (if income is being squeezed), payment for exports, etc…
The BoP suggest that 60% of the outflow in 1Q12 was driven by foreigners exiting Spain, with the rest initiated by domestic residents. But, it looks as if the majority of the latter was driven by Spanish banks, rather than by Spanish households and corporates. And Spanish banks may have temporarily moved some LTRO cash abroad (and in addition they had €89bn on average parked in the Bank of Spain’s deposit facility during March). Hence, foreigners are pulling out of Spain, but whether domestic residents are abruptly shifting funds abroad is still less clear based on these data. In this sense, the BoP and M3 data seem quite consistent.
The aim is not to downplay the severity of Spain’s situation. In fact, we think that Spain will end up having to ask for external assistance. The available BoP and M3 data also do not cover the last few weeks. But, for now, the main driver appears to be capital rather than deposit flight, and it appears to be driven by foreigners rather than Spanish residents. Even that is troubling of course and has pushed up the Bank of Spain’s TARGET2 liability to the ECB to an average of €285 billion in April.
But even if deposit flight might not have speeded up, Spain’s banks are living on borrowed time and an actual recapitalisation is of utmost importance.
The dithering (or more probably gamesmanship) going on at the moment seems to be leaving the ECB frustrated. Again from the FT:
In a damning indictment of Spain’s handling of the problems at Bankia, its third largest lender, ECB president Mario Draghi said national supervisors had repeatedly underestimated the amount a rescue would cost. He also cited the rescue of Dexia, the Franco-Belgian lender, as an example.
“There is a first assessment, then a second, a third, a fourth,” Mr Draghi said. “This is the worst possible way of doing things. Everyone ends up doing the right thing, but at the highest cost.”
Speeding along the bank recap
So, in the interest of hurrying things along, it’s handy that a few analysts took a quick look at how much a total recap of Spain’s banking sector might cost and whether Spain can handle it. Then all we have to worry about is how they do it.
For the purpose of the exercise, UBS’ analysts estimated the overall bank recapitalization needed to be near €100bn, deliberately above a consensus of €80bn or so.
(Credit Suisse, for example, estimate additional provisioning needs of just over €150bn which is likely to translate into a capital shortfall of €50-70bn or 4.5-6.5 per cent of GDP)
And what they wonder is, considering that the Spanish government has revised its 2011 budget deficit to 8.9 per cent of GDP and a host of new data on regional and central government deficits, including on the issue of arrears, have become available, is — can Spain afford it?
According to the government consolidation plan presented last month Spanish debt will increase by 11 percentage points this year, peak at 82 per cent in 2013 and then trend down:
In order to achieve the targets above, central and regional governments will have to keep their deficits at or below the levels presented in table 2 below. These appear to be ambitious targets, particularly during a recession. We think a slippage in the 0.5% – 1% range is likely, leaving the 2012 deficit slightly above 6%.
So how sustainable is the debt/GDP level under the above circumstances? And how would a bank recapitalization affect it? Again from UBS:
Without the recapitalization, we expect Spanish debt to hit 81% this year, peak at 85% in 2014 and then trend down to 76% by the end of the decade. Assuming a bank recapitalization worth € 100 bln, the debt would instead pass 90% this year, peak at 94% in 2014 and then decline to 84% by 2020. These numbers suggest that, although putting considerable pressure on the sovereign market, the recapitalization would not push the debt to unsustainable levels. Notice that we conservatively assume a 1% fiscal slippage in both 2012 and 2013, a recession in both years and a nominal trend growth of 2.5% (1% real growth, 1.5% inflation).
But Credit Suisse suggest:
A worst case scenario assumes bank recapitalisation needs of €100bn (around 10% of GDP) and GDP growth 1pp below our base scenario. This year’s 1.7% downturn would be followed by another steep decline of 1.3% next year, raising Spanish debt to 110% of GDP by 2015 and –in the absence of more stringent fiscal austerity –continuing to rise thereafter.
While bank bailouts based on bursting property bubbles bring Ireland’s slide to mind, it is important to remember that Spain’s €100bn bill is still only some 9.3 per cent of its GDP compared to the whopping 29.7 per cent of GDP injection needed in Ireland two years ago:
Essentially, it’s a difference of magnitude which analysts suggest should allow Spain to wear the cost, assuming that €100bn figure remains conservative of course and these things can… just… keep… creeping.
Bankia, Spain, the ECB and a proliferation of “mistakes” – FT Alphaville
Spain, Bankia and the credibility problem – FT Alphaville
Spain’s long climb to the liquidity hospital [updated] – FT Alphaville