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Spanish Bank Bailout: Chasing Shadows

June 11, 2012

The excitement on the back of bailout of Spanish banks is baffling to say the least.  The focus, from a credit perspective has been on wrong issues.  The correct framework  to evaluate the medium term worth of this bailout is the framework  we had suggested for assessing the credit strength of the EFSF ( See https://crediteye.wordpress.com/2011/11/21/credit-analysis-of-the-efsf/)

Use of such a framework would capture the following:

  •  It is assumed that Germany has infinite resources to bail out one banking system after another (Ireland yesterday, Spain today, Italy/Germany tomorrow?).  Is it true?  Or does this come at the cost of Germany’s own long term solvency? (German debt to GDP ratio is not small) 
  • The impact of the ongoing recession in Europe on increased banking system non performing assets has largely been ignored.  The focus has so far been on loans to real estate developers.  How much of the corporate loans across Europe would sour?  How about retail loans in an environment of rising unemployment?  How much of the corporate non performing loans would be at German banks that financed the export of German goods to other EU countries?
  • What would be the impact on the solvency of European banks/insurance companies when there is a 100 bp jump in 10 year German bond yield (we opine that the “flight to quality” story has a finite shelf life).  

Without clear answers to these troubling questions, the present rally in just one of the sucker rallies we have seen since 2011- a few months joy followed by tears.  You just can’t have a rally in equity related assets in a global environment that is seeing a plethora of asset sales- whether by governments, banks or corporates.  Also, as we said in an earlier piece, liquidity fuelled  rallies always put at peril long-term solvency.

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From → Credit Analysis

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