Spain lurching further toward bankruptcy
(MoneyWatch) COMMENTARY There is an increasing amount of speculation in the press that Spain, or at least its entire banking system, is going to need a bailout. This would not be so worrying if a bailout were possible, and there weren't quite so many official denials. When it comes to sovereign debt, an official denial means it's time to head for the bomb shelter.
On Wednesday, Klaus P. Regling, chief executive of the euro zone's current bailout fund, told The New York Times: "I don't foresee the need for Spain to come, but there is a lot of money available." Perhaps even more disturbing, he then added that there were "lots of positive elements in Spain that are ignored at the moment but that, no doubt, over time will become clearer to everybody."
Those positive elements are being ignored because the rest of us are looking at what is usually referred to as "reality."
Also on Wednesday, the Bank of Spain announced the nation's banks were holding more bad loans than at any time since Bill Clinton's first term in office. Between January and February of this year, the amount of non-performing loans held by Spanish banks increased by $5 billion. They now make up 8.2 percent of the banks' credit portfolios.
That number will almost certainly increase. Most of those loans are mortgages, and Spain's housing prices dropped by 7.2 percent during the first quarter. Additionally, the nation also has the highest unemployment rate in the EU, which takes some doing when you consider that Greece is also in the running.
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Bad mortgages are not the only thing in the banks' portfolios. They also have an increasing amount of Spanish government debt. These are still technically worth something. From December to January, Spain's financial institutions increased the amount of government bonds they are holding by 26 percent. The total face value of those bonds was $289 billion at the end of January.
That is pretty much the only reason for Tuesday's "successful" auction of Spanish bonds. It was deemed a success because the nation sold all of the bonds it wanted to. However, Madrid had to promise to pay nearly twice the interest rate it paid at the last bond auction, which was less than a month ago.
Spain is Europe's fourth largest economy, with a GDP of $1.4 trillion. This makes it impossible to bailout. If you "just" want to bailout the nation's banks, the news is even worse. Spain's three largest banks have combined assets of about $2.7 trillion, or just a little bit less than twice the country's GDP.
