Not surprising news really. When you’ve been in denial for so long this is what you should expect. Spanish banks lost as much as 8 percent at Monday’s market opening (before recovering later) after the government announced the first intervention in a Spanish bank since 1993. The euro was also down 0.9 percent on the day at $1.3177 at 12:000.

From the Wall Street Journal this morning:

Spanish banking stocks plunged Monday as a banking bailout announced this weekend indicated the country’s financial sector may not be as immune to the current financial crisis as previously thought.

The Bank of Spain has taken over management of small savings bank Caja Castilla La Mancha and will provide it with as much as EUR9 billion of liquidity, the government said Sunday.

Stocks in Banco Santander SA (STD) fell 5.6% to EUR5.04 at 0749 GMT, while rival BBVA (BBV) was down 4.4% to EUR6.05, and Banco Popular SA (POP.MC) fell 5.5% to EUR4.68, pressuring the IBEX-35, which declined 3.1%.

Spanish Finance Minister Pedro Solbes Sunday said the intervention in Caja Castilla La Mancha was an isolated case, and that the overall Spanish banking system remained “extremely healthy.”

Yet some analysts are not convinced. “This intervention supposes that the Spanish financial system isn’t immune to the international situation,” Banesto analyst Ignacio Soto Palacios. “We expect a bad performance of the sector in the short run.”

In the short run, in the medium run, and in the long run, if I may be so bold.

There is no doubt about it: Italy’s economic situation has worsened considerably during the current quarter. Only last week the OECD forecast that Italy’s gross domestic product is likely to fall by 4.2 percent in 2009. This follows hot on the heals of an earlier statement where the OECD said the situation in Italy this year and next was “much worse” than it had previously thought, and that Italy would not come out of its recession until “sometime” in 2010 at the earliest. According to the earlier forecast the OECD expected GDP to fall this year by one percent and then by a further 0.8 percent in 2010. Continue reading →

Now here’s an interesting story. Slovakia has just joined the eurozone, a status most of the rest of the EU’s East European members would badly like to attain. But just to remind us that joining the zone, while offering considerable support and protection in times of trouble, is no panacea, Moody’s Investors Service have last Friday cut their outlook on Slovakia’s government bonds rating (to stable from positive, implying their is no likelihood of an upgrade in the near future, a possibility which was implicit in the earlier positive outlook). Continue reading →

Well , we didn’t have to wait too long. Only last Friday I wrote the following:

Two Spanish regional savings banks have already reached a preliminary merger deal – Unicaja, based in Spain’s southern Andalucia region, and the smaller Caja Castilla La Mancha (CCM), located in the central-southern province of the same name – following talks which were carefully brokered by the Bank of Spain. Clearly this merger willl need to be followed by a capital injection from Spain’s Deposit Guarantee Fund to help them clean up the “troubled assets” which will naturally be found in the combined accounts of the new bank which emerges.

Today we learn that the merger is off. It is off for the simple reason that Caja Castilla La Mancha is about to cease to be an independent, autonomous entity. It has been “intervened” by the Bank of Spain. This is the first, it will not, of course, be the last.

According to Noticias Cuatro:

The governing council of the Bank of Spain has taken the decision to intervene in the operation of the Caja after carrying out an analysis of its financial position, thus taking as read that the negotiations which might have lead to its merger with the Andalucian ‘Unicaja’ have not been able to reach a successful conclusion.

The “intevention in Caja Castilla La Mancha will mean in the first place that the Bank of Spain will now manage the Caja directly via the management commission it is about to establish. Sources at the central bank have given an assurance that all the banks clients’ savings are guaranteed. The Bank of Spain will now negotiate with the government urgent measures to guarantee the liquidity of the Caja, and its normal functioning.

In the second place, the Bank of Spain will be responsible for making an immediate detailed evaluation of all the Caja’s assets and liabilities. In addition the central bank intervention implies the immediate replacement of the entire previous bank Administrative Council.

The last time the Bank of Spain intervened in a Spanish bank was in 1993, when the central bank too over control of Banesto. The necessary decisions will be taken in the next few hours since all other potential solutions have been discarded, including the assimilation of the Caja with Caja Madrid.

The Spanish newspaper El Pais reports that the Spanish cabinet (the Consejo de Ministros) are holding an extraordinary meeting at 18:00 this afternoon to discuss a proposed Decree Law to inject capital into the bank.

According to Finanzas.com, the “hole” in Caja Castilla La Mancha could be something in the order of 3 billion euros. This money could be paid from the bank funded Deposit Guarantee Fund (FGD), however, and as I said on Friday:

the (FGD) insurance fund holds only 7.2 billion euros in bank contributions, and since this is orders of magnitude less than the size of the problem it is obvious the government will end up having to putting money into the recapitalisation process, and especially into the Savings Bank sector, since the Spanish press has been reporting that 20 of Spain’s 45 savings banks are now considering mergers. And it is obviously only a matter of time before one of the mid-sized Spanish banks like Popular, Sabadell or Banesto joins the consolidation process.

So it is not clear at this point how the capital injection process will be financed, nor is it completely clear what will happen to those deposits of over 100,000 euros, the maximum presently guaranteed under the FGD insurance system.

What was it someone once said, oh yes, that’s it, “stuff happens”, and there is of course plenty of that ubiquitous stuff hitting the fan right now. So to test you all to breaking point, here are just two more topics related to Spain, one almost an incidental detail at this point, and the other something which goes right to the heart of the problem. Continue reading →

First, the one year Euribor reference rate, which has been falling since the ECB started lowering interest rates in the autumn of last year.

And secondly the chart showing the average rate of interest charged by Spanish banks on new mortgages, which as we can see, has been rising steadily since December 2007.

The average interest rate charged by Spanish banks for new mortgages in January 2009 was 5.64%, meaning that the average cost of a new mortgage had gone up by 10.2% over January 2008 (when the rate was 5.1%), and by 1.1% when compared with December 2008. Meanwhile the Euribor reference rate looks set to close this month at all time record lows of 1.91%. In January – the last month for which we have data on mortgage lending – the Euribor rate was 2.27%.

The reasons lying behind this upward movement in Spanish mortgages are twofold. On the one hand the Spanish banks are having increasing difficulty raising finance due to their perceived risk level, and on the other they themselves have have been forced to raise the risk premium they charge to clients due to the rising levels of non performing mortgages they have on their books.

Basically what this means is that the ECB policy isn’t working in Spain, and that despite the massive quantities of liquidity provided, the monetary conditions continue to tighten, and doubly so give that the real value of the rates charged (ie the inflation adjusted value) keeps rising automatically as inflation falls. Continue reading →