Now Rajoy is tackling the banks

New Prime Minister Rajoy is switching his focus from the parlous state of the government finances to those of Spain’s troubled banks. In particular, he is attempting to force Spain’s banks to properly provision for losses on bad and doubtful property loans. According to some estimates, bad property-related loans held by banks are as much as EUR 200bln, whereas banks have only made provision for perhaps one-third of that total. Total loans outstanding are EUR 1.79trln. The Bank of Spain recently reported that loans in arrears (where no payment had been made for three months) rose to a 17-yr high of 7.5% in November.

Economy Minister de Guindos is keen to see Spanish banks lift provisions significantly during the upcoming reporting season by setting earnings against it. A couple of weeks back he intimated that another EUR 50bln could be added. The government is also keen on bank mergers where some of the larger and stronger players take on the smaller and more vulnerable ones. In contrast to the approach adopted in some other European countries such as the UK, Rajoy wants to avoid committing any additional public funds to the banks. Instead, banks have been asked to foot the bill for some of the restructuring that has taken place already, and there is every prospect that they will be asked again. The problem with this approach is that investors would balk at investing in stronger banks while the risk that earnings would be diluted remained. At the same time, the Spanish government simply has no other option - it cannot afford to inject money it does not have.