Spain’s troubled banks turn off credit tap

19:01 El NACHO 0 Comments

Amid the turmoil of the latest phase of the eurozone financial crisis many Spanish banks have found a way to survive the drought of wholesale funding on which they relied in the past to finance their lending.
But their solution – turning off credit taps even to solvent borrowers – smacks of desperation and has angered employers and threatens to tip the economy back into recession.

“It is impossible for the banks to access the markets, as has been the case over the past couple of months,” said one senior commercial banker. “So the only way to generate liquidity is by reducing the commercial gap – that is, the difference between loans and deposits. This means a credit crunch.”
The evidence is stark across the Spanish financial system.
According to Analistas Financieros Internacionales (Afi), a research group, Spanish lenders need to refinance €97.5bn ($138.5bn) of maturing loans over 2011. Of that, €31.05bn was raised in the first five months of the year, although no debt has been raised since a poorly received €1bn covered bond from Santander , the country’s biggest bank, two months ago.
Of the remaining €66.45bn, banks had covered €30.27bn by the end of May simply by cutting loans faster than they lost deposits to generate a so-called positive gap. “All the generation of the ‘positive gap’ is being achieved through the reduction of credit,” said Alfonso García, Afi managing director.
Santander, which generates much of its profit overseas in Latin America and the UK, cut its loan-to-deposit ratio from 150 per cent at the end of 2008 to 116 per cent on June 30 this year as part of what one banker describes as a “brutal” deleveraging. At Santander’s Spanish businesses, the ratio fell from 183 per cent to 122 per cent over the same period. For Santander’s branch network, customer loans fell 6.8 per cent in the year to June.
With some of the smaller unlisted savings banks, or cajas, fearing they could run out of cash within months, those with liquidity to spare are eager to talk about it.
Banca Cívica, a medium-sized bank formed of four cajas that floated last month, boasts of a €8.91bn cushion of liquid assets that it says will cover not only its €2.11bn of debt maturing in 2011, but the repayments due in the following four years as well.
The credit squeeze by the banks explains in part why Spanish banks did not, in the first half of the year at least, increase their recourse to liquidity provided by the European Central Bank. They kept their demand below €50bn in June.
Another reason was greater reliance on repurchase transactions through clearing houses such as LCH.Clearnet, where banks can increase short-term liquidity using government bonds as collateral.
The danger with this option is that if sovereign bond prices fall again LCH.Clearnet could increase margin requirements, thereby restricting access to banks in search of liquidity and triggering the need for a bail-out as happened in the cases of Ireland and Portugal.
In the longer term, Spanish banks that cut credit lines to corporate borrowers risk throttling the Spanish economy and hurting their own business, even if bank executives feel they have little choice but to try to attract more deposits and reduce lending to plug their funding gaps.
“We believe we can definitely make it through 2012 by deleveraging and by making efforts to capture deposits,” said one executive at a large Spanish bank. “It’s the only thing we can do.”
Spain’s employers’ group, the Confederación Española de Organizaciones Empresariales (CEOE), complained this month that Spain was the only large economy in the eurozone where business lending continued to contract.
Bank loans to business were down 2.4 per cent in June compared with a year earlier, whereas in the eurozone as a whole there was a 1.5 per cent increase, the group’s research showed.
The CEOE complained that the private sector faced “expulsion” from access to bank credit, while the public sector took too large a share of new lending.