May 29, 2012
One of the problems with the Hispanic Pandora’s box unleashed by a now insolvent Bankia, which as we noted some time ago, is merely the Canary in the Coalmine, is that once the case study “example” of rewarding terminal failure is in the open, everyone else who happens to be insolvent also wants to give it a try. And in the case of Spain it quite literally may be “everyone else.” But before we get there, we just get a rude awakening from The Telegraph’s Ambrose Evans-Pritchard that just as the bailout party is getting started, Spain is officially out of bailout money: “where is the €23.5 billion for the Bankia rescue going to come from? The state’s Fund for Orderly Bank Restructuring (FROB) is down to €5.3 billion.”
From here on out, the alternatives have been discussed to death and are clear as day: either the ECB, and the global central bank syndicate, inflates away the debt, which can only happen if Germany gives the ECB a carte blanche to print up the the $3-5 trillion required to backstop the European financial system, or we proceed straight to an instance of “Odius debt”/debt moratorium/write down, which however with trillions in daisy-chained, rehypothecated, partly submerged within the broker-dealer mediated shadow banking system, liabilities permeating throughout the global financial system, the outcome would be a tremor that shakes the very foundations of the financial system, in the process also impairing the $1 quadrillion OTC derivative credit money pyramid. In other words: nobody wants to, pardon, nobody dares to do anything, and the best Europe, and by implication the world, can hope for is to survive day to day, without launching the terminal financial D-Day. Pritchard’s summary of next steps is expected: “The result of Europe’s policy paralysis is more likely to be a disorderly break-up as Spain – and others – act desperately in their own national interest. Se salve quien pueda.” Only it is not only Europe. It is the entire world. But it will start in Europe. And specifically Spain, which unlike Greece is too big to be swept under the rug. It is also a place where the zombies are now congregating.
In an indication of just how surreal the modern financial world has become, none other than Bloomberg has just come out with an article titled “Spain Delays and Prays That Zombies Repay Debt.” We can only surmise there was some rhetorical humor in this headline, because as the past weekend demonstrated, the best zombies are capable of, especially those high on Zombie Dust, or its functional equivalent in the modern financial system: monetary methadone, as first penned here in March 2009, is to bite someone else’s face off with tragic consequences for all involved. What Bloomberg is certainly not joking about is that the financial zombies in Spain are now everywhere.
Spain is trying to clean up its banks, requiring lenders to set aside more for possible losses on loans deemed performing to developers like Metrovacesa SA (MVC), which hasn’t completed a project in more than a year and has none under way. While that represents about 30 billion euros ($38 billion) of increased provisions, it’s not enough because many of the loans said to be performing aren’t, said Mikel Echavarren, chairman of Irea, a Madrid-based finance company specializing in real estate.
“Spain has engaged in a policy of delay and pray,” Echavarren said in an interview. “The problem hasn’t been quantified by anyone because there is huge pressure not to tell the truth.”
Yes, lying and ignoring reality are truly signs of a stable, mature system. Just look at Bankia, which went from “profitable” to broke in a few days. And at the risk of repeating ourselves for the nth time, Bankia is merely the beginning.
The Economy Ministry says that Spanish banks have 184 billion euros of developers’ loans and assets that are “problematic,” while the remaining 123 billion euros are performing. The need for more reserves to cover losses on the loans can’t be ruled out, Nomura International analysts Daragh Quinn and Duncan Farr said in a May 14 report. If Spain took losses on developer loans like Ireland did, Spanish banks would need 8.9 billion euros under the best case to 76.5 billion euros of additional provisions in the worst scenario, Nomura estimates.
A hole as big as €76.5 billion, plugged with… the €5.3 billion left in the FROB? Good luck. And why is the hole there to begin with? Because of the same lies and same prayers and delays that are now the only policy instrument left in the administration’s arsenal:
Many Spanish banks are avoiding property sales so they don’t have to make “mark to market” valuations. Instead, they’re giving developers new loans to pay debt coming due to prevent defaults, said Ruben Manso, an economist at Mansolivar & IAX and a former Bank of Spain inspector.
“The larger banks have been selling bits and pieces and can absorb the losses,” Manso said. “Smaller savings banks are acting in bad faith in their refusal to allow transactions and saying they can’t mark to market because there isn’t one.”
A spokeswoman for CECA, the association for Spanish savings banks, who declined to be identified citing company policy, said the group can’t comment on the banks’ commercial policies.
While there is virtually no clarity, one case gives us a terrifying glimpse into the murky waters beneath the surface:
Metrovacesa, once Spain’s largest developer, is typical of the industry, according to Manso. The Madrid-based company, which once owned HSBC Holdings Plc’s London headquarters and had about a 50 billion-euro market value, was taken over by creditors in 2009 after its largest shareholder struggled to service billions of euros of debt.
Metrovacesa has racked up 1.8 billion euros of losses since 2008. It has debt of 5.1 billion euros and property assets valued at 3.9 billion euros.
“The banks have made writedowns in their Metrovacesa stakes, but they haven’t taken the full hit,” Manso said.
Metrovacesa currently trades at 38 cents a share, valuing the company at about 375.5 million euros. UBS AG downgraded the shares to sell on May 22 and changed its target price to 32 cents. In August, its lenders renegotiated the terms of 3.6 billion euros of its debt, extending maturities on 2.47 billion euros of obligations and granting a five-year grace period for interest payments on 1.12 billion euros of loans.
“Having no controlling stake in Metrovacesa means that its creditor banks don’t have to consolidate the company’s debt or assets and contaminate their own balance sheets,” Manso said. “There are hundreds of cases like Metrovacesa out there, albeit smaller in size, and this distorts the official amount of real estate and bad developer loans that banks profess to have.”
Terrifying, because proper accounting treatment would mean that the abovementioned €76.5 billion in max provisions is really orders of magnitude lower than what the final number will be.
Of course, it wouldn’t be an article about a ponzi scheme if it didn’t have an official refutation. Sure enough:
Metrovacesa isn’t a zombie, said a company spokesman, who
declined to be named citing company policy.
And That, ladies and gents, just won the prize for the most hilarious denial in the history of denials… to date. As the ponzi unravels more and more each day, the above case will be rather serious compared to what is in the pipeline. But for now, a company spokesman forced to deny that the company he works for is not an undead creature with a penchant for brains does it for us.
projects in mind, but the market doesn’t allow homebuilding, he
Wait, wasn’t everything Bush’s fault? Or in the worst case: Merkel? Now we get one more culprit for lack of market clearing. Why, the market itself of course.
But if the above hasn’t caused blood to shoot out of one’s ears yet, the next paragraphs absolutely will.
More than half of Spain’s 67,000 developers can be categorized as “zombies,” according R.R. de Acuna & Asociados, a real-estate consulting firm. They have combined debt of 180 billion euros that will lead to 104 billion euros of losses that hasn’t been fully provisioned for, Acuna estimates.
“They aren’t officially bankrupt because they have been refinanced time and time again,” Fernando Rodriguez de Acuna Martinez, a partner at the company, said by telephone. “Their assets are worth much less than their liabilities, they struggle to repay loans and they haven’t revaluated them to reflect today’s prices.”
And that, in a centrally planned world, is why no company is allowed to go bankrupt – because the central banks merely allow them to refi into perpetuity, even if, as is admitted, “assets are worth much less than their liabilities” – surely a justification to invoke the Fed’s emergency Section 13(3) emergency powers…
In the meantime, the Fed’s domestic partner, the Bank of Spain is doing all it can to avoid the realization that zombies walk among us:
The Bank of Spain allows loans that are refinanced before turning delinquent and interest-only loans to be considered “normal” or “performing” on banks’ books, according to Manso.
“You won’t find that data anywhere,” Manso said. “There has been a lot of cheating going on where banks have lent developers new money, classed as new lending, so they can pay off their original loans.” That’s masking delinquency, he said.
Refinancing the current and future zombie developers will cost 30 billion euros over the next two years, according to Acuna. The depreciation of those developer assets from 2012 onwards will generate a further 20 billion euros of losses in that time, he said.
And saving the absolute farce for last:
Echavarren’s Irea brokered the refinancing of a 200 million-euro loan two years ago for a developer. After two more rounds of refinancing, there is about 180 million euros left on the loan and it’s classified as performing, he said, without identifying the company.
“The probability that this loan will be paid when it comes due is zero,” Echavarren said. “There are dozens of similar cases.”
Spain’s government and banks need to be more like their counterparts in Ireland and be more forthcoming about loan losses, according to Echavarren. He forecasts that the larger Spanish banks with income from international operations will be able to pay for domestic real-estate losses within two years. The rest can’t take such a hit and will have to be nationalized, he said.
“We cannot continue to jeopardize the whole financial system by not telling the truth,” Echavarren said.
Who says we can not: why, it is the sole prerogative of every central bank not to fight inflation, not to maximize employment, and lately, not even to keep the Russell 2000 over 800. It is merely to perpetuate the lies, to extend and pretend, to keep the zombies in check, to repeal every law of math, physics and statistics known to man: from the second law of thermodynamics, to simple sine wave oscillations, to prop the insolvent as the liabilities get exponentially bigger than the assets, to change accounting rules, and to pretend that reality matters, until everything finally crashes.
Which at this point is a certainty.
For those of an inquisitive nature, the only question is when. But, frankly, even that is becoming less and less relevant with each passing day.