Spanish banking sector to pay for its sins

December 9, 2011

By Fiona Maharg-Bravo
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Spain wants its banking sector to pay for its sins – literally. Banco Sabadell is taking troubled lender CAM off Madrid’s hands, and Spain’s bank-backed deposit guarantee fund is helping by making a big capital injection. Such deals minimise the cost to the taxpayer, but aren’t a free lunch for the state and won’t solve the sector’s problems.

The CAM rescue does not come cheap. Sabadell will adopt CAM after it receives a 5.25 billion euro capital injection from the deposit guarantee fund (FGD). This pot has 6.6 billion euros in resources, and has also agreed to guarantee 80 percent of losses on 24.6 billion euros worth of CAM’s assets over 10 years. An auditor has estimated the potential losses at 5.5 billion euros, of which 3.9 billion euros have already been set aside by CAM. If this forecast is right, the total cost of the CAM rescue – the capital boost plus the insurance on the unprovisioned losses – will be 6.5 billion euros.

The advantage of this scheme is that the CAM rescue will have zero impact on this year’s budget deficit, at a time when the government is already likely to miss the 6 percent of GDP target. But the country’s bailout fund, the FROB, will still have to guarantee CAM’s funding. What’s more, the CAM rescue will drain the FGD’s resources, which are also earmarked to guarantee deposits as well as pay for potential losses of past and future bank rescues.

Small wonder that the government recently ordered lenders to beef up their contributions to the FGD. These could total up to 2.5 billion a year, based on 2010 numbers, according to Cheuvreux estimates. But this is nowhere near enough to cover future losses in the system, particularly if the new government opts for creating a bad bank for all 176 billion euros worth of impaired and foreclosed property assets.

So the FGD will have to ask for yet more support from the sector, or borrow money externally using a state guarantee. The added burden on the banking sector won’t help the credit crunch in Spain. In the past, half of the FGD was financed by the state. Spain’s next government priority must be to come up with a definitive bank restructuring.

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