Opinion

Felix Salmon

Counterparties: Europe’s other crisis – the private sector

May 10, 2012

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By now, most of us are familiar with a sovereign debt crisis – Greece being the prime example of a highly indebted country unable to pay its bills. But the European crisis is being fought on several fronts at once. Today, S&P warned of a “perfect storm” of maturing debt for European companies – there’s some $46 trillion in debt coming due in the next five years. While this amount is global, S&P says poses a big problem for the Europe’s non-financial companies in particular. As the NYT reports this morning in a look at construction titan A.C.S. Grupo, Spain’s private sector may already be struggling with this type of problem. “The problem in Spain is not government debt, it’s private sector debt,” Jonathan Tepper of Variant Perception told the NYT.

In Spain, there are questions about the accuracy of the government’s estimation of its problem. Bloomberg’s Yalman Onaran, building off a report from the Centre for European Policy Studies, has a disturbing report of his own:

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.

At FT Alphaville, Lisa Pollack dives into the analyst reports and wonders if Spain’s housing market has even bottomed out yet. If it hasn’t, banks will need significant additional capital. But instead of acting quickly, Nouriel Roubini says that a “bailout for Spanish banks has been postponed until the very last minute”. The private-debt problems in Spain risk worsening the country’s public-debt problems, especially in the context of an economy where the stock market is hitting a 9-year low and the government has just partially nationalized one of the country’s biggest banks. – Ryan McCarthy

On to today’s links.

TBTF
JPMorgan announces suprise $2 billion loss - WSJ
The FDIC is about to explain how it will save us from “too big to fail” banks – WSJ

Confessions

A trader’s reason for choosing his occupation: “actually, money is quite important” – Guardian

EU Mess
Former Greek econ minister: Bailout program “suicidal, not only for Greece but for the euro” – WSJ
China has stopped buying European debt – Bloomberg

Financial Arcana
How Chesapeake’s growth is fueled by murky, off-balance-sheet funding – Reuters
Chesapeake’s deals add $1.4 billion in previously undisclosed liabilities – WSJ

Wonks
Paul Krugman’s 18-slide presentation making the case against austerity – Princeton
Citi’s Buiter: Time for central bankers to do “helicopter money drops” – CNBC

Facebook
Facebook has a large and growing problem with mobile advertising – NYT
The rare hedge fund manager who’s hit it big on pre-IPO Facebook – Forbes
FTC investigating Facebook’s acquisition of Instagram for antitrust violations – Venture Beat

Economy
America’s healthcare costs add up to a hidden 8% VAT – Charles Hugh Smith

Alpha
The most important question an investor can ask: “What am I missing?” – DealBook

Oxpeckers
Who copyedits the copy editors? – The Awl

Troubling
China’s import-export activity just tanked – CNN Money

Politicking
Romney reportedly bullied a gay student while in prep school – WashPo

Awesome
A great profile of the hardest working financial blogger in the business – NYT
The billiant Joe Weisenthal – Felix

Comments
3 comments so far | RSS Comments RSS

The bad debts of private sector real-economy firms become the problems of their lenders, the banks – and the problems of the banks become the problem of the taxpayers. Can you spell I-R-E-L-A-N-D?

How about – R-E-P-U-D-I-A-T-I-O-N?

Posted by MrRFox | Report as abusive
 

Maybe you prefer to spell Ireland with a “c” instead of that “r”.

Posted by Christofurio | Report as abusive
 

@Chris – Would have been much better for the Irish if their leaders could have demonstrated the resolve of their counterparts in the land of ice. But those pols couldn’t say “No” to a double-barreled dose of intimidation ala Merkozy.

Treason is an ugly word, but if one checks the legal definition, ….

Posted by MrRFox | Report as abusive
 

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