Spain Emerging as Winner after EU Stress Tests

Posted on July 30, 2010 by spanishproperty

The results coming out of Europe�s bank stress test are less important than the accessibility of the inputs to investors. That is why the country with most �failures� � Spain � is emerging as the biggest winner.

In a financial crisis sprung by new-fangled securities, Spain went down the old-fashioned way. A Spanish property bust and soaring unemployment can even break the back of banks in compliance with the country�s wise dynamic provisioning rules. When the sovereign debt panic swept across the eurozone�s periphery, wholesale lenders increasingly saw Spanish banks as dead men walking.

But skirting the precipice of a banking collapse shook Madrid out of its initial complacency. It understood that any rot in its banks had to be cleaned out lest it contaminate the whole system and the wider economy. Even the most solid of Spanish banks was experiencing funding problems. The government commendably, if imperfectly, set about to force the cajas to consolidate, provided a mechanism for recapitalising banks and, crucially, threw its weight behind the EU stress test.

In truth it had few alternatives. But by actively embracing transparency � Spanish banks were by far the most numerous participants in the test, and Madrid has ladled out information on top of that provided at the European level � Spain has shown that leadership in a financial crisis is not beyond Europe�s capacity.

The test makes it easier for markets to discriminate between the virile and the weak among Spanish banks. Madrid�s ability to bail out those that fail is less in doubt now that the amounts needed seem likely to be manageable. Forcing creditors to take a hit through forced debt-for-equity swaps, however, would be braver and better.

The charge that the stress test were not harsh enough � which is true � is not a fatal flaw. The US exercise also used an adverse scenario that soon did not look all that different from the actual situation. But it released enough information for investors to make up their own mind. The European test must achieve the same.

That is why the secrecy on German banks� sovereign holdings is so damaging. Bafin, the German regulator, has been at best lukewarm at encouraging disclosure, despite a pan-European agreement to do so. If German law makes this difficult, Berlin must change it.

Not only individual banks but banking as a whole is systemically significant. The opacity of the sector�s balance sheets made the crisis possible. It cannot be sustained.

Story from Financial Times

Posted in Spanish property | Tagged , , , , , | Leave a comment

Spain to Cancel €6.4 Billion of Projects to Slash Deficit

Posted on July 30, 2010 by spanishproperty

The Spanish government announced on Thursday it would postpone or cancel 231 public works projects as part of an austerity drive aimed at slashing a budget deficit equivalent to 11.2 per cent of gross domestic product.

Jos� Blanco, the public works minister, said he had been forced to cut �6.4bn ($8.2bn, �5.4bn) of state-funded works over the next two years, equal to about 20 per cent of planned or awarded tenders.

This would mean delaying 199 contracts for up to four years and cancelling or restructuring 32 others. Worst hit by the austerity drive were road and rail developments in northern regions such as Catalonia, Aragon and Cantabria.

Spanish new construction and infrastructure companies, already bowed under the weight of boom-time debt and hit by the collapse of the residential housing market, have warned that the cuts could add more than 100,000 workers to the 4.2m already unemployed.

�The projects had already been awarded, so the companies had already taken on workers,� said Juan Lazcano, chairman of the National Construction Confederation. �These [job contracts] will have to be cancelled.�

Mr Blanco, however, told parliament he had no choice. �We are aware that this will have an important effect on infrastructure companies,� he said. �[However], the civil works sector must be restructured.�

Spain�s governing Socialists have been under pressure to rein in spending after watching a public sector surplus turn into one of the eurozone�s largest deficits in just two years.

Although expected, the cuts have been harshly criticised by lobbyists for a sector that grew accustomed to generous returns during a 15-year property, tourism and civil works boom, partly financed by European Union funds. Mr Blanco said on Thursday the government had invested �86bn in the past six years.

The good times ended when the Spanish housing bubble burst in 2007 and the global credit squeeze and ensuing recession starved companies and governments of infrastructure funds. Thousands of small and medium-sized property developers, construction companies and suppliers have disappeared , putting 1m workers on the dole.

UBS, in a report published this week, warned that even company-funded infrastructure projects were at risk because of Spanish banks� reluctance to lend to a sector that is already over-leveraged.

Public sector budgetary restraints would also hit infrastructure groups that had diversified into street cleaning, waste management and similar services, according to the bank.

�Spanish infrastructure groups are highly exposed to environmental and urban services, where the major clients are municipal governments also facing tough budget restrictions,� UBS said.

Story from Financial Times

Posted in Spanish property | Tagged , , , , , | Leave a comment

Spanish Stress Tests Highlight Divergence

Posted on July 30, 2010 by spanishproperty

The stress test results published by the Bank of Spain on Friday underlined the performance gap between the commercial banks that account for half of the sector and many of the savings banks whose bankrolling of the Spanish property surge left them exposed as the construction boom collapsed.

Five Spanish banks are likely to require a total of about €2 billion, or $2.5 billion, in additional capital after failing the stress tests carried out by the Bank of Spain. Their failure did not come as a shock, however, because many of the savings banks, or cajas, had already needed to seek additional government funding.

“A lot of progress has been made since the start of the crisis – and this is part of the progress, Miguel Angel Fernandez Ord��ez, governor of the Bank of Spain, said in Madrid on Friday. The tests, he said, showed the enormous means available to Spanish banks to overcome any deepening of the crisis.

“When there are doubts, you have to be absolutely transparent, and this is what we have done,” he added. “People are not stupid and will realize that the Spanish banking sector as a whole is pretty clearly above average.” He added: “I have faith in the markets.”

Mr. Fernandez Ord��ez said the test results vindicated the recent push to force the cajas to consolidate, as well as a regulatory overhaul approved last week by the Spanish Parliament to allow the cajas to open up as much as 50 percent of their capital to outside investors.

The five banks were also among a recent wave of mergers that are due to cut the number of cajas to about 20 from 45. One of the test failures, CajaSur, was de facto removed from the list following its recent takeover. The Spanish central bank rescued CajaSur in May after it rejected a merger proposal from a larger rival. CajaSur was then auctioned, with the winning bidder, Banco Guipuzcoano, announced only last week.

In contrast, all of Spain’s commercial banks relatively easily passed the stress tests, led by Banca March, whose Tier 1 capital would remain at 19 percent even under a deepening hypothetical economic slump. The Tier 1 capital of the largest Spanish bank, Santander, would meanwhile remain at 10 percent, well above the 6 percent minimum level recommended by the committee that carried out the European tests. The commercial bank with the weakest Tier 1 capital structure, according to the tests, was Banco Pastor, which would just meet the 6 percent threshold.

I�igo Vega, banking analyst at Iberian Equities, a Madrid brokerage, said that the tests showed it would be “manageable” for the restructuring fund, whose funding capacity could be leveraged as high as €99 billion to cover any additional shortage of capital for the cajas.

“Over all, there were no surprises; if anything, there was lower capital shortage than expected,” Mr. Vega said.

Given Spain’s recent liquidity problems, analysts will be watching whether spreads in the fixed-income markets move significantly during the next two weeks. “That is the key prerequisite for a rerating of the sector across the board as funding remains the key risk factor,” Mr. Vega said.

Just hours before the publication of the stress test results, one of the revamped cajas announced the first deal with an overseas investor, a deal struck in the wake of the regulatory overhaul approved by the Spanish Parliament earlier this month.

J.C. Flowers, a U.S. buyout firm, agreed to buy €450 million of convertible bonds from Banca Cavica, as a likely prelude to a stock market listing by Cavica, itself the result of an alliance between three savings banks: Caja Navarra, Caja de Burgos and Caja Canarias. Banca Cavica was among the cajas that failed the tests in results announced Friday.

Earlier in the day, Emilio Bot�n, chairman of Santander, the largest Spanish bank, said that the sector had “clearly improved” during the past month and that the Spanish banking sector was in a situation on par with, if not better than, elsewhere in Europe. He also welcomed the Bank of Spain’s stress tests as a “colossal” exercise in transparency that surpassed what had been done earlier in the United States.

Jose Luis Rodriguez Zapatero, the prime minister, applauded the publication of Spanish results on Friday, arguing that the tests had gone further than those in other European countries, notably in terms of detailing the risks linked to lending to the collapsed property sector.

Story from The New York Times

Posted in Spanish property | Tagged , , , , | Leave a comment

SHN Aims to Boost Confidence of Home Buyers and Agents

Posted on July 30, 2010 by spanishproperty

The Spanish Homes Network (SHN) furthered its initiative to bolster confidence and credibility in the country’s residential sector this week.

Speaking at a press conference in London, SHN managing director Jose Manuel Luque outlined the networks’ intention to offer greater reassurances to both international agents and final customers.

“For all homes listed on the portal we collaborate with one of the four most prestigious law firms who then issue legal certificates which verify the investment security and habitability of the property,” he said.

Properties listed on the “master agents” portal are all therefore completed buildings and are endowed with full legal security and approval from the regional Spanish authorities.

Speaking to OPP Luque said these measures mean that “foreign agents no longer have to travel to Spain to check and certify properties. The SHN provides all information necessary to complete sales.”

“We are trying to change the image that Spanish real estate has with overseas property buyers. There has been a lack of confidence in recent years which has created a big problem in Spanish real estate,” said Luque.

There are believed to be around 1 million unsold properties littered around Spain. Echoing the comments of Crest Group International chief executive Ian Waudbry (OPP News, 8th June) Luque said he believes now is the right time for overseas agents to re-apply themselves in the region as property prices are definitely reaching their “bottom-level.”

Story from OPP

Posted in Spanish property | Tagged , , , | Leave a comment

Investors Predict Spain Will Benefit from Stress Tests

Posted on July 30, 2010 by spanishproperty

Investors are betting that Spain’s government will benefit more than its troubled euro-zone peers from the results of Europe’s “stress tests” of big banks Friday.

Despite growing concern about the rigor of the European tests, Spain’s government bond market has rallied in recent days, effectively lowering the country’s cost of borrowing from the capital markets.

A key indicator: The extra interest that Spain has to pay investors to buy its debt instead of that of Germany, considered Europe’s safest borrower. This so-called “risk premium” is 1.64 percentage points Wednesday compared with 2.1 percentage points just a week ago. Other troubled countries in the euro bloc such as Ireland, Portugal and Greece haven’t seen that kind of improvement.

Traders in the derivatives market are less gloomy, too. The cost to insure Spain’s government bonds against default using financial contracts called credit-default swaps has dropped dramatically this month: It now costs $205,000 a year to insure $10 million of Spanish government debt compared with $274,000 on June 29 – a 25% drop.

Even shares of one of Spain’s biggest banks, BBVA, have been on the upswing lately, rising to €9.50 from about €7.50 in mid-June.

So what’s going on?

Wilson Chin, an analyst at Dutch bank ING, points to several reasons for the improving view of Spain in the bond market – other than the emergency rescue-mechanisms that European leaders and the European Central Bank have launched.

One possibility is that Spain is simply experiencing a positive bounce as investors start to dial back their excessive bearishness about its banking system.

Until fairly recently, Spain, the euro’s fourth biggest economy, was touted as the heir to Greece on the European debt crisis throne because of its ailing regional lenders, or cajas, which were sideswiped by Spain’s property market bust.

Now, despite Spain’s weak economy, Spanish newspapers are proclaiming that the country’s banks, including the cajas, will pass the stress tests with flying colors. That boosted Spanish government bonds on Tuesday. Spain also took the lead on the stress-test project in the first place, nudging less willing European countries to do the same, which gave it some credibility. And there have been moves to consolidate the banking sector to deal with weak cajas.

Economists and analysts remain skeptical. As David Enrich of the WSJ points out in an article on Tuesday, economists at the Royal Bank of Scotland Group did their own “stress” study and found that Spain’s banking sector faces a roughly € 50 billion capital shortfall in the event of a downturn.

But Mr. Chin says investors may be heartened by a second factor: Spain has repeatedly raised cash from the capital markets in recent weeks without a hitch. There were reports of strong interest from foreign investors, including China. The government’s borrowing costs actually fell during a debt sale on Tuesday. Spain was scheduled to repay some € 16 billion of debt at the end of this month. Nobody’s worried about that anymore.

Of course, the coast is far from clear for Spain. But given how gloomy things got just a few weeks ago and the easing stress in Europe’s financial system, there’s a chance we’ll see more sun in Spain than some market bears expect.

Story from Wall Street Journal

Posted in Spanish property | Tagged , , , , , | Leave a comment