- Reaction score
- 63
- Points
- 530
This is one of my favorite financial blogs and todays discussion of the Spanish banks possibly lying about their financial health could be devestating to Spain and maybe to Europe as a whole.I have posted the first part of the analysis the rest involves charts and such.
http://brontecapital.blogspot.com/
Whether the Spanish banks are hiding their losses is a major debate going on in the blogosphere and has been detailed at length in the Financial Times. The stakes are very high – this is a debate about the stability of the Eurozone and possibly of Europe itself.
Background
I have a lot of American readers whose interest in finance stops at the American border. I need to outline what is going on.
Spain had a monstrous building boom – a building boom on (at least) Californian standards based very much on coastal development. The building boom has slowed considerably. The building boom attracted relatively unskilled labour – as building booms are apt to do – and about 40 percent of all migrants to EU settled in Spain. Wikipedia (I wish I could read the original Spanish source) state that the foreign population in Spain has gone from about half a percent of the population in 1981 to over 11 percent recently. This change in racial mix has resulted in only minor tensions (with the possible exception of the large terrorist attack in Madrid).
The financial crisis has hit Spain hard. Unemployment is about 20 percent – though this overstates the GDP contraction. A lot of the new immigrants are now unemployed.
Twenty percent unemployment would normally result in large bank losses – indeed you would expect bank insolvencies. However this has not happened. The two giant Spanish banks (Santander and BBVA) appear amongst the most profitable in the world and have substantial market capitalisation. Strangely Spain looks solvent despite its apparent economic catastrophe. Part of the explanation might be that the economic problems in Spain fall mainly on the newer immigrants and the unskilled end of the labour market – and that these people are not the loan customers of the bank. In this formulation the Spanish recession is about the same depth as the American recession – and the 20 percent unemployment rate is just an artefact of the migrant economy.
Either way both big banks are depleting loan reserves (at least compared to delinquency and non-performing loans). But both banks are reporting low losses and low loan arrears.
The banks however could be lying.
The stakes are enormous. The bears (led by Spanish resident Economics Professor Ed Hugh and the financial research house Variant Perception) argue that the Spanish regulators and banks are conspiring to hide Spain’s insolvency – and when Spain turns out like Argentina either the European central bank (that is the old German central bank) will bail out Spain at great cost to the Central Europeans or the European monetary experiment – and possibly the whole European political experiment will be challenged as Spain fails economically and socially. It’s alright to bail out Latvia after its economic disaster. Latvia is small. Spain however is large and important in a European context. Ed Hugh would argue that it is best to deal with the problem now – because delayed it will get much worse.
Do not for a minute think that the stakes here are overstated. Full blown economic collapses (eg Latvia, Iceland, Argentina) usually lead to riots and governments falling. Where ethnic tensions run high those riots often have a racial element (rioting crowds find scapegoats). Europe can paper over the Bronze Solider riots in Estonia (which pre-date the crisis). They can paper over riots in Iceland and Latvia because the economies are small. But an economic disaster in Spain would pose major difficulties – difficulties I think European Union would survive – but which would stress the system to its core.
To be this bad though the banks would need to be hiding their losses on a grand scale. Most banks in crises hide a few losses (and spread them over time). However the bears are truly apocalyptic. The Variant Perception report is an absolute classic of hyper-bearishness. If it really is that bad then either central European taxpayers are going to be stuck with a huge bill or the core political union in Europe is vulnerable.
Less worried folk have pointed to inconsistencies in both Ed Hugh and Variant Perception’s data analysis. An ordinary level bank failure could be dealt with by Central European taxpayers with only minor stress – however if you believe Variant Perception we are not looking at an ordinary level collapse – its way bigger than that. Ibex Salad – a blog with the unlikely topics of the Spanish Stock Market, Spanish Economy and the olive oil business is the counterpoint to Ed Hugh and Variant Perception.
The data is mostly ambiguous – as the bears would argue – the data is largely faked anyway – finding inconsistencies in the data is to be expected. They would argue that common sense – and the overbuild visible when you open your eyes – indicates that there is a serious problem here.
I really do not know. I am not close enough to the ground in Spain to know – and – frankly – analysing (supposedly) faked data in a language I can’t read from a desk in Australia is unusually difficult. But there seem to be four variants.
(a). The Spanish banks are telling the truth – and this is a storm in a teacup,
(b). The Spanish banks are doing a normal amount of bank over-optimism in the face of a crisis – and whilst the banks are really stretched (but not telling us) the banks are ultimately solvent – and the European experiment is fine,
(c). The Spanish banks are in fact diabolical – and the losses are maybe 15-20 percent of a year of Spanish GDP – in which case a bailout by (effectively) German taxpayers is possible or
(d). Variant Perception is in fact unreasonably bullish – and Spain will collapse economically and socially and we will be thankful if all we get back is someone like the Generalissimo. The modern European experiment will be deemed to fail because a single European Union with a single currency can’t hold together in a crisis because Germany won’t or can’t bail out Spain, Italy and Greece in a crisis.
Instinctively I am in camp (b) above. However I acknowledge all of the above are possibilities.
Migration, racism and currency union
I am going to do a little further explaining of the stakes here. The threat to currency union in Europe always was ultimately racism.
When you have currency union you can no longer have a high interest rate in Spain or Italy (when those economies warrant a high rate) and have a low rate in Germany when Germany is recessed. You have a single interest rate across the currency zone.
The underlying state of most of the past 15 years was Spain booming, Germany mildly recessed. Currency shifts or shifts in value between the Deutsche Mark and the Peseta can – by dint of currency union – no longer happen. The main mechanism of economic adjustment is removed.
America has always done that. The same interest rate applies in the rust belt, in the sun belt, in California and in Boston. And we know how economic adjustment happens. Americans move. A vast number of Americans do not live in their home town and the bulk of the world’s busiest airports are American. Internal American migration is massive.
However migration within Europe has always involved more issues. The languages are different. Several countries have histories of nasty endemic racism. There are large cultural barriers.
Monetary Union – whether by design or just outcome was always going to confront those barriers. And it was always going to be slow. There is a reason why the German/Spanish imbalance was so long lasting last decade – which was that it is much harder for a German to move to Spain than it is for say a Hoosier to move to California.
The changing racial mix of Spain throughout the boom seemed to show that massive shifts in racial mix and massive internal migration could be accommodated without the tensions of Europe’s dark past. They were the embodiment and a proof of the European political experiment. If Spain collapses beyond bail-out (as per Argentina) then monetary union is over – and economic union with racial harmony will be challenged.
As I said – the stability of Spain is a big issue and the crux point is the losses in the Spanish banking system.
The Spanish American data
Sitting at my desk in Bondi Australia I have no real advantage in answering the big questions about the solvency of Spain and whether Spain really is the black hole in Europe’s balance sheet.
But I can add to the debate. The Spanish banks have American operations – and using reasonable comparisons we can work out whether the Spanish banks are hiding their American losses. So far I have not seen any analyst do this – but it is surely worthwhile. I am going to focus on BBVA because I once had a detailed understanding of their American operation (Compass).
Several years ago BBVA paid a premium to buy Compass to form BBVA Compass.* This is how they describe the bank:
BBVA Compass is a leading U.S. banking franchise located in the Sunbelt region. BBVA Compass is among the top 25 largest banks in the U.S. based on deposit market share and ranks as the third largest bank in Alabama and the fourth largest bank in Texas. Headquartered in Birmingham, Alabama, it operates 579 branches throughout Texas, Alabama, Arizona, Florida, Colorado and New Mexico
This bank files US statutory filings (better known as “call reports”). There is no reason to presume that the Spanish regulator is conspiring with American regulators to fake the accounts of a bank headquartered in Alabama. Moreover there are other sunbelt banks to use as comparisons – whereas in Spain you can only really compare BBVA to Santander – and the bears would argue that there is no point checking for faked data by comparing it to other faked data.
If BBVA is telling the truth in America then there is a reasonable chance they have a culture of truth telling. That would suggest that they are probably telling the truth in Spain.
However if BBVA’s American accounts are riddled with deception (or at least an overly-optimistic prediction as to their losses) then it is likely that BBVA has a culture of understating losses – and that that culture extends home to Spain.
Of course the truth could be (and I would normally expect the truth to be) somewhere in the middle. A little bit of excessive optimism is normal behaviour for a banker in a crisis. But a little bit of excessive optimism does not imply bank or national insolvency – just some difficulty. The European experiment can survive that. [more at the link]
http://brontecapital.blogspot.com/
Whether the Spanish banks are hiding their losses is a major debate going on in the blogosphere and has been detailed at length in the Financial Times. The stakes are very high – this is a debate about the stability of the Eurozone and possibly of Europe itself.
Background
I have a lot of American readers whose interest in finance stops at the American border. I need to outline what is going on.
Spain had a monstrous building boom – a building boom on (at least) Californian standards based very much on coastal development. The building boom has slowed considerably. The building boom attracted relatively unskilled labour – as building booms are apt to do – and about 40 percent of all migrants to EU settled in Spain. Wikipedia (I wish I could read the original Spanish source) state that the foreign population in Spain has gone from about half a percent of the population in 1981 to over 11 percent recently. This change in racial mix has resulted in only minor tensions (with the possible exception of the large terrorist attack in Madrid).
The financial crisis has hit Spain hard. Unemployment is about 20 percent – though this overstates the GDP contraction. A lot of the new immigrants are now unemployed.
Twenty percent unemployment would normally result in large bank losses – indeed you would expect bank insolvencies. However this has not happened. The two giant Spanish banks (Santander and BBVA) appear amongst the most profitable in the world and have substantial market capitalisation. Strangely Spain looks solvent despite its apparent economic catastrophe. Part of the explanation might be that the economic problems in Spain fall mainly on the newer immigrants and the unskilled end of the labour market – and that these people are not the loan customers of the bank. In this formulation the Spanish recession is about the same depth as the American recession – and the 20 percent unemployment rate is just an artefact of the migrant economy.
Either way both big banks are depleting loan reserves (at least compared to delinquency and non-performing loans). But both banks are reporting low losses and low loan arrears.
The banks however could be lying.
The stakes are enormous. The bears (led by Spanish resident Economics Professor Ed Hugh and the financial research house Variant Perception) argue that the Spanish regulators and banks are conspiring to hide Spain’s insolvency – and when Spain turns out like Argentina either the European central bank (that is the old German central bank) will bail out Spain at great cost to the Central Europeans or the European monetary experiment – and possibly the whole European political experiment will be challenged as Spain fails economically and socially. It’s alright to bail out Latvia after its economic disaster. Latvia is small. Spain however is large and important in a European context. Ed Hugh would argue that it is best to deal with the problem now – because delayed it will get much worse.
Do not for a minute think that the stakes here are overstated. Full blown economic collapses (eg Latvia, Iceland, Argentina) usually lead to riots and governments falling. Where ethnic tensions run high those riots often have a racial element (rioting crowds find scapegoats). Europe can paper over the Bronze Solider riots in Estonia (which pre-date the crisis). They can paper over riots in Iceland and Latvia because the economies are small. But an economic disaster in Spain would pose major difficulties – difficulties I think European Union would survive – but which would stress the system to its core.
To be this bad though the banks would need to be hiding their losses on a grand scale. Most banks in crises hide a few losses (and spread them over time). However the bears are truly apocalyptic. The Variant Perception report is an absolute classic of hyper-bearishness. If it really is that bad then either central European taxpayers are going to be stuck with a huge bill or the core political union in Europe is vulnerable.
Less worried folk have pointed to inconsistencies in both Ed Hugh and Variant Perception’s data analysis. An ordinary level bank failure could be dealt with by Central European taxpayers with only minor stress – however if you believe Variant Perception we are not looking at an ordinary level collapse – its way bigger than that. Ibex Salad – a blog with the unlikely topics of the Spanish Stock Market, Spanish Economy and the olive oil business is the counterpoint to Ed Hugh and Variant Perception.
The data is mostly ambiguous – as the bears would argue – the data is largely faked anyway – finding inconsistencies in the data is to be expected. They would argue that common sense – and the overbuild visible when you open your eyes – indicates that there is a serious problem here.
I really do not know. I am not close enough to the ground in Spain to know – and – frankly – analysing (supposedly) faked data in a language I can’t read from a desk in Australia is unusually difficult. But there seem to be four variants.
(a). The Spanish banks are telling the truth – and this is a storm in a teacup,
(b). The Spanish banks are doing a normal amount of bank over-optimism in the face of a crisis – and whilst the banks are really stretched (but not telling us) the banks are ultimately solvent – and the European experiment is fine,
(c). The Spanish banks are in fact diabolical – and the losses are maybe 15-20 percent of a year of Spanish GDP – in which case a bailout by (effectively) German taxpayers is possible or
(d). Variant Perception is in fact unreasonably bullish – and Spain will collapse economically and socially and we will be thankful if all we get back is someone like the Generalissimo. The modern European experiment will be deemed to fail because a single European Union with a single currency can’t hold together in a crisis because Germany won’t or can’t bail out Spain, Italy and Greece in a crisis.
Instinctively I am in camp (b) above. However I acknowledge all of the above are possibilities.
Migration, racism and currency union
I am going to do a little further explaining of the stakes here. The threat to currency union in Europe always was ultimately racism.
When you have currency union you can no longer have a high interest rate in Spain or Italy (when those economies warrant a high rate) and have a low rate in Germany when Germany is recessed. You have a single interest rate across the currency zone.
The underlying state of most of the past 15 years was Spain booming, Germany mildly recessed. Currency shifts or shifts in value between the Deutsche Mark and the Peseta can – by dint of currency union – no longer happen. The main mechanism of economic adjustment is removed.
America has always done that. The same interest rate applies in the rust belt, in the sun belt, in California and in Boston. And we know how economic adjustment happens. Americans move. A vast number of Americans do not live in their home town and the bulk of the world’s busiest airports are American. Internal American migration is massive.
However migration within Europe has always involved more issues. The languages are different. Several countries have histories of nasty endemic racism. There are large cultural barriers.
Monetary Union – whether by design or just outcome was always going to confront those barriers. And it was always going to be slow. There is a reason why the German/Spanish imbalance was so long lasting last decade – which was that it is much harder for a German to move to Spain than it is for say a Hoosier to move to California.
The changing racial mix of Spain throughout the boom seemed to show that massive shifts in racial mix and massive internal migration could be accommodated without the tensions of Europe’s dark past. They were the embodiment and a proof of the European political experiment. If Spain collapses beyond bail-out (as per Argentina) then monetary union is over – and economic union with racial harmony will be challenged.
As I said – the stability of Spain is a big issue and the crux point is the losses in the Spanish banking system.
The Spanish American data
Sitting at my desk in Bondi Australia I have no real advantage in answering the big questions about the solvency of Spain and whether Spain really is the black hole in Europe’s balance sheet.
But I can add to the debate. The Spanish banks have American operations – and using reasonable comparisons we can work out whether the Spanish banks are hiding their American losses. So far I have not seen any analyst do this – but it is surely worthwhile. I am going to focus on BBVA because I once had a detailed understanding of their American operation (Compass).
Several years ago BBVA paid a premium to buy Compass to form BBVA Compass.* This is how they describe the bank:
BBVA Compass is a leading U.S. banking franchise located in the Sunbelt region. BBVA Compass is among the top 25 largest banks in the U.S. based on deposit market share and ranks as the third largest bank in Alabama and the fourth largest bank in Texas. Headquartered in Birmingham, Alabama, it operates 579 branches throughout Texas, Alabama, Arizona, Florida, Colorado and New Mexico
This bank files US statutory filings (better known as “call reports”). There is no reason to presume that the Spanish regulator is conspiring with American regulators to fake the accounts of a bank headquartered in Alabama. Moreover there are other sunbelt banks to use as comparisons – whereas in Spain you can only really compare BBVA to Santander – and the bears would argue that there is no point checking for faked data by comparing it to other faked data.
If BBVA is telling the truth in America then there is a reasonable chance they have a culture of truth telling. That would suggest that they are probably telling the truth in Spain.
However if BBVA’s American accounts are riddled with deception (or at least an overly-optimistic prediction as to their losses) then it is likely that BBVA has a culture of understating losses – and that that culture extends home to Spain.
Of course the truth could be (and I would normally expect the truth to be) somewhere in the middle. A little bit of excessive optimism is normal behaviour for a banker in a crisis. But a little bit of excessive optimism does not imply bank or national insolvency – just some difficulty. The European experiment can survive that. [more at the link]
