BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Do Spain and Euro Zone Even Know What The Truth Looks Like Yet?

This article is more than 10 years old.

Spain's double talk over its financial needs seems finally to be driving them to a bailout while the markets are closed over this weekend. Monday, though, could bring some shocking news about the extent of Spain’s needs. Anyone who thinks the bailout is a solution, read on.

Spain's banking black hole could be anything from $120 billion to $480 billion according to estimates doing the rounds this week (see below and this Roubini analysis).

On the American side of the pond, there is an assumption that the Europeans can just agree to a bailout-lite, a non-punishing loan directly into Spanish banks to solve this problem. But there are two major barriers.

I pointed out earlier this week that direct support to banks is extremely unlikely in the short term because it requires constitutional change. A direct bank bailout involves central regulation of banking affairs, which would extend the EU's role. Any arrangement that extends the EU’s powers in member states is a constitutional issue. Right now sovereign Governments regulate their own banking sectors. To give that power to an EU body would mean, in Ireland for example, a referendum.

Oh and by the way the Eastern European member states are also broke. There is a little known Vienna Agreement under which west European banks have agreed not to withdraw money too quickly from the East in order to stall the disruption we have seen in the south. Once the conditions of bail out start to look tolerable, the door is open to other indebted nations.

But the real snag with Spain is to understand just what is needed. Across Europe, Governments and banks have consistently failed to declare the extent of the problems they face.

I’ve just come back from the USA where the assumption seems to be that this problem is fixable through good political decision-making. In fact it is banjaxed by barrier number 2 - total uncertainty over scale of the problem.

Only two weeks ago, Spain's troubled Bankia unit was restating a "profit" as a Euro 3 billion loss. A week on and the Euro 3 billion became a request for aid of Euro 19 billion. The Spanish Government has now given Bankia over 23 billion.

From a distance, China Daily estimates Bankia’s needs, alone, at Euro 40 billion based on a 30% increase in poorly performing loans.

The Spanish banking system is thought to contain at least Euro 180 billion of poor developer loans. But that is probably only half the story – Spanish banks have been very aggressive at exporting tourism-led development in Latin America where loans could also be in jeopardy. Spanish banks and developers are tightly coupled because the banks bailed out developers like Hansa Urbana early in the crisis.

Spanish mortgage debt is under duress because people’s incomes are going down, so the reality of 4 years ago when this crisis began is very different from the reality now. That China Daily estimate of a 30% increase in bad debts is also exacerbated by stricter rules for estimating the likelihood of non-performing loans.

Euronews, based in Brussels, gives a very broad estimate of the total European bailout need, Euro 60 billion to 200 billion. I pointed to another estimate recently of Euro 400 billion.

What does all this mean?

The action this weekend has to be taken on a scale that convinces skeptics that all of Spain’s banking debts are out in the open.

Spain has still to convince the markets that its sovereign debt is manageable, despite the downgrades.

A deal has to prevent Ireland, Portugal, Greece from coming back to renegotiate, or the deal has to find a way to relieve austerity in this three countries too.