Tightening the Noose

News from two days ago that the Banco de España has decided to raise the provisioning requirements for real estate loans from 20 to 30 percent has not gone down well with the listed banks - particularly (and maybe counter-intuitively) the two big ones. First casualty has been our recommended long-SAN-and-BBVA/short-builders spread. Flying directly out of the blocks with a near 10 percent gain, this leveling of the field had, when we closed yesterday afternoon, reduced that to a four and a half points. The rout continues today.

On a less personal note, it's more than a little ironic that the primary victims of this directive are the two banks that had so publicly and recently taken profit hits by... augmenting those same reserves. The four domestic banks that are listed on the index have gotten off relatively lightly.

We made the point in the above-mentioned entry that Santander's and BBVA's biting of the bullet was certain to place yet more pressure on the not-listed cajas de ahorros. Not unexpectedly, it has taken these only 24 hours to come out swinging in the aftermath of this next attack on their solvency.

El Economista yesterday reported that the president of the caja's trade association CECA (of which neither Caja Madrid nor La Caixa are members), Juan Ramón Quintás, believes that these provisioning requirements threaten to collapse the real estate market. Implying that the measure has not been well thought out he seems to have said that what Spain needs are 'surgeons, not apprentice witches' in charge of policy.

Señor Quintás knows in his heart what the issue is here. Besides the fact that the BDE has been fairly public in its insistence that housing prices should fall considerably further - not thinking it appropriate that the banks are satisfied with trading very low, if totally stable, sales volumes for only slightly decreasing prices - the Spanish central bank's governor, Miguel Angel Fernández Ordóñez, is more than mildly irritated at the success the cajas are having in resisting almost any and all measures intended to actually make them viable institutions in the long term. His preferred solution is the amalgamation of many of these petty and all too politically connected regional fiefdoms, but the lentitude of the negotiations and the regular walking away from the table of participants are proving this ineffective. Outstanding among the cases is that of CajaSur. Forced into the arms of competitor Unicaja, the Córdoba-based regional continues to stonewall the implementation of a fusion agreement already signed and sealed.

We suspect that a certain number of these will not be able to come up with the dough to comply with the new regulation. But Mr. Fernández (or MAFO, as he is referred to in the press) may find himself between a rock and a hard place when it comes to closing down some of these flim-flam operations. Exiting fairly unscathed from the Greek tragedy and its accompanying and predictable round of really bad foreign press (note that Spain 10-years are again yielding under 4 percent), he is faced over the next few months with the immediate task of rolling vast sums of short-term, credit crisis debt further out the line. A series of failures, small and cheesy as the affected institutions might be, would not ease this task.

Last week, despite the roiled debt markets, the BDE managed to unload 1 billion euros of an off-the-run 30-year, maturing in 2037, at a yield of about 12 bps (we believe) over market. It was oversubscribed 2:1. Next up in March - a 5 and a 10.

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