Spanish banks will be forced to sell off equity holdings

The Spanish bank bailouts do not come without conditions, some of which provide great opportunities for investors to buy equities held by the banks at fire sale bargain prices. While this will end a cozy relationship between the banks and some top companies it will also mean that equities will be sold at very low prices with the banks losing money on their investments in many cases.
The cost of Spain's banks being recapitalized by the European Union include a requirement that they sell off their equity assets. These assets include large holdings of telecom leader Telefonica, Repsol the giant oil company and power company Iberdola,.

An estimated 28 billion U.S. will be up for sale. The total is as much as 9 per cent of the capital of Spain's blue-chip index. Flemming Barton an analysts said::"They're going to have to sell. And with no light at the end of the tunnel as far as the macro, political dance, the chances of holding out for a better price increasingly look like wishful thinking," said Flemming Barton, analyst at CM Capital Markets

A number of so-called vulture funds are eying these sales of equities hoping to profit from the misfortunes of the banks. For much more see this article. Today the situation appeared to be worsening as costs for floating new bonds increased.

Next focus in Eurozone debt crisis may be Italy

Rumours of the Spain bank bailout sent stock markets up on Friday in many countries. When the 100 billion band aid was actually announced over the weekend the response was for U.S. markets to turn negative before closing Monday (June 11). Spanish bond interest rates rose to high levels. However now the band aid has been applied to Spain some analysts are concerned about Italy.

Italy's borrowing costs rose after the Spanish bank bailout. The yield on 10 year bonds crept up to 6.04 per cent in the biggest daily gain since back on Dec. 8, 2011. Shares of Italy's largest bank UCG declined sharply.

Analyst Nicola Marinelli said:.“The scrutiny of Italy is high and certainly will not dissipate after the deal with Spain,” . “This bailout does not mean that Italy will be under attack, but it means that investors will pay attention to every bit of information before deciding to buy or to sell Italian bonds.”

Italy has a 2 trillion euro debt. Only Greece and Japan of developed nations have larger debts as percentage of GDP. Italy has to market more than 35 billion of bonds etc. each month to finance its debt. If the cost of borrowing continues to increase Italy like Spain may need help. For much more see this article.

Spain may be forced to borrow 50 billion U.S. from European Stabililty Fund

Today (June 9) finance ministers from the Eurozone are holding a teleconference on an expected request from Spain for aid. The teleconference was planned after the IMF (International Monetary Fund) issued a report Friday which estimates Spain requires an injection of at 50 billion U.S. dollars to bail their banks out. The IMF did a stress test on the banks.

An Al Jazeera reporter said:"Reports we are getting from various sources suggest that there will be this conference call from Brussels between the 17 finance ministers of the eurozone, the so-called eurogroup. The Spanish finance minister will be among them," "What we believe they will be discussing is the sort of size and shape of the terms attached to a possible bailout for Spain, to inject fresh capital into its banks."" So far Spain has insisted that it does not need a bail out. Spain worries that it will be required to commit to even more austerity measures and will lose control of financial policy. However, given the situation borrowing such a huge amount of money through bonds would be horrendously expensive if even possible.

On Thursday Fitch rating agency cut Spain's sovereign debt rating by three more points to BBB because of the banks exposure to bad loans. The Al Jazeera correspondent concluded with good reason:"It is becoming increasingly clear that the government here doesn't really have a choice; that IMF bill is in for the banks, according to its audit around $50bn, and other institutions put the figure much higher than that. The Madrid government simply doesn't have that kind of money and this banking crisis has to be solved,"

Spain is expected to ask for money from the European Financial Stability Facility. It has available 440 billion euros so would be easily able to provide the money. The big question would be what the conditions would be for receiving the funds. For more see this article.

World Bank warns European officials to act on debt crisis immediately

The head of the World Bank Robert Zoellick said in the Financial Times that it is time to pull the emergency alarm. He wrote: "while those living in the euro-zone building, especially those on the executive floors, will not want to hear an alarm, they had best read the instructions. Events in Greece could trigger financial fright in Spain, Italy and across the euro zone, pushing Europe into a danger zone."

While the concern about events is hardly new there is an increased urgency about warnings. The stock markets today (June 1st) in the U.S. Canada and Europe have taken notice with big drops. European officials are warning that actions must be taken immediately before events spiral out of control. But that seems to be what is happening in Spain and Greece.

The European Central Bank leader Mario Draghi warned that that the euro structure as it stands is "unsustainable unless further steps are taken" He added that leaders "must clarify what is the vision … what is the euro going to look like a certain number of years from now?"

The Italian Prime Minister Mario Monti demanded that the European Stability Fund be allowed to directly provide capital to struggling banks. The move is opposed by Germany.

Events in Spain are one important immediate cause for concern. The central bank noted that 97 billion Euros had left Spain in the first three months of 2012 alone. This amount is equivalent to 10 per cent of the Spanish economy. This makes clear that Spaniards have no faith in their own economy or government.

The central government is injecting money it can ill afford to rescue Bankia the third largest Spanish bank. As a result borrowing costs for ten year bonds are climbing to near 7 per cent an interest rate that the government simply cannot afford. For much more see this Der Spiegel article.

Spanish bank to seek 19 billion U.S. rescue loan

Bankia SA, Spain's fourth largest bank, saw its share trading suspended on Friday (May 25th). The bank is expected to request more than 19 billion U.S. from the government.

Bankia is faced with many bad real estate debts but it also holds 10 per cent of Spain's bank deposits. The bank was unable to raise enough capital to deal with its burgeoning losses from bad real estate debt. A real estate boom in Spain crashed in 2007 and 2008 and banks are still suffering from the bad loans made at the time.

The government has already spent 4.5 billion euros to keep the bank afloat and partially nationalized it. The entire rescue package may cost 20 billion euros. This will force Spain to go to the markets when borrowing costs are already high.

The expenditure of money to rescue banks is causing some anger among the populace when Spain is being forced to cut spending on hospitals and education to meet EU austerity demands. Many think that the plan by the Conservative government of Mariano Rajoy to try to bring the deficit down to 5.3 per cent of GDP is doomed to failure. Shares in Bankia have fallen 34 per cent on the Madrid stock market since May 7. Perhaps Spain will see more withdrawals of funds from its banks. For much more see this BNN article.

Spanish economic troubles continue

As well as Greece Spain remains a concern in the ongoing EU debt crisis. Bankia the bank in which the government recently took a large stake was rumored to be losing depositors. Shares crashed on the stock exchange but recovered somewhat today.

Moodys credit agency added to the jitters by downgrading the credit ratings of several Spanish banks. If Greece were to leave the Euro zone this would cause even fear and investor worries about Spain. Any such move might make the cost of borrowing for Spain prohibitive.

Even the present problems are raising the cost of borrowing for Spain. Analysts estimate that Spanish banks may have up to 100 billion Euros in bad real estate loans. The government plans to require banks to retain up to 30 billion Euros to cover bad loans.

Spain may need to seek support for its banks through the European Financial Stability Facility. The uncertainties in Greece produce uncertainties in Spain. For more see this article and also here.