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Worried about the Spanish banking system? Don’t be. The domestic economy could double dip, wholesale funding costs could spike and yet Spain’s banks wouldn’t need a massive infusions of new capital.
So says Bank of America Merrill Lynch in a 77-page report published on Monday, which aims to separate “Facts from Fiction”.
And here are some of those ‘facts’:
Spanish listed banks had â?¬53bn of debtterm maturities to roll over in 2010, of which â?¬30bn has been funded already. The net â?¬23bn funding need represents 8% of total debt-term maturities.
We ran two sensitivity analysis with highly bearish assumptions to gauge a more severe-than-expected economic outlook. In our #1 scenario we stressed loan growth and provisions for domestic Spain. If we assume a 50% increase in loan loss provision charges vs our conservative base-case scenario, along with an additional 5% contraction in loan growth vs our base case, the negative impact on Santander's 2010-11E EPS would be -5%, -15% for BBVA and an average of -60% for domestics banks.
In our #2 scenario we assumed a global dip recession with provisions peaking at mid-90s levels for two consecutive years and 11% fall in 2011 revenues followed by flat 2012. Such scenario analysis lowers 2011 earnings by 65% for international banks and by 100% for domestic's banks. Nevertheless if we assume that 7% is the minimum required core Tier I ratio, our coverage of listed banks should raise only â?¬2bn, being the most affected Bankinter and Banco Sabadell while Santander and BBVA are quite resilient.
In fact, Merrill is also remarkably sanguine about the challenges facing the Spanish economy overall. As the report continues:
Unlike Greece, Portugal or Ireland (with 1.5% – 2.5% of Euro GDP each), Spain is not a small economy. It accounts for almost 12% of Euro GDP. On our European Economics team' fiscal scorecard, Spain is No. 4 on the list of vulnerable countries after Greece, Portugal, Ireland. While Spain’s 2009 fiscal deficit was high at 11.2% of GDP, the debt level – at 53.2% in 2009 – was still well below the Eurozone's 78.7% average.
For Spain, our European Economics team considers that the task of making its fiscal situation sustainable is thus comparatively easy. The government recently enacted by decree most of the fiscal tightening (including a 5% cut in public sector wages) that euro leaders had asked Spain to do upon agreeing on the â?¬750bn safety net for fiscally challenged Euro members beyond Greece. We expect Spain to cut expenditure and raise taxes by about 2.5% of GDP in 2011 to reduce its fiscal deficit to 6%. The Spanish economy started to grow again in Q1, though by a feeble 0.1% QoQ.
What the above overlooks, of course, is Spain’s private sector liabilities. When added to its sovereign debt, this creates a rather nasty cocktail, as RBS noted in a recent report:
The problem for Spain – and one that we think is not well understood – is the degree of private sector liability on top of only high-ish sovereign debt. This total economy debt is over 300% of GDP and the specific problem is that much of this is funded by non-residents. (That’s the difference between Japan and large parts of Europe.) We expect a greater reluctance by non-residents, which essentially means Northern Europe, to roll the debt over. It is most dangerous for banking systems and while we should not expect any funding problems here near term, this news-flow and fundamental backdrop is corrosive for financial stability, and warrants ongoing underweights in Spainish Government Bonds. We continue to advise switches to Italy.
Which we would say are some ‘Facts’ to worry about.
Related links: Europe: It's more than just government debt – Felix Salmon A Japanese casa for Spain – FT Alphaville Spain is trapped in a ‘perverse spiral’ as wage cuts deepen the crisis – Ambrose Evans-Pritchard / Daily Telegraph
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