May 14 2012
Spain and Spanish Bank Dilemma!
Spain and Spanish Bank Dilemma!
Why Read: Because what is happening in Spain is happening quickly, may not be understood in a property valuation context, and may be a harbinger of things to come in other countries.
Featured Articles: Two May 11 articles raise further issues with Spain’s announcement last week that some of its banks are undercapitalized and have not made sufficient property loan provisions:
- the first article reported Friday that rather than inject equity into the banks it believes requires more capital, Spain plans to lend those banks money at high interest rates; and,
- the second article reported on a further move by the Spanish Government to cause key Spanish banks:
- to raise their provisions against “toxic” property loans from 7% to 30%,
- to separate their real estate loans from the rest of their assets,
- to raise what appears from the article to be at least 30 billion euros of additional capital within 15 days to counter-balance falling Spanish property prices, and
- have the value of their property portfolios scrutinized by two separate auditing firms – who will determine the value of their property portfolios.
Commentary: Follow this closely, and consider that:
- it is highly doubtful, unless these Spanish banks have been working on raising equity for some time, and simply haven’t completed the process, that they will succeed in raising new equity within 15 days (May 26);
- it is likely beyond highly doubtful that if the two auditing firms are just now beginning an audit of property values underlying the bank’s property loan portfolios, they will be able to reach meaningful property valuation conclusions within two weeks – simply because of the time-frame involved, and the likely complexity of their task;
- now valuation undertakings have been announced, it may be that any interested ‘new equity investors’ may wait until the completion of those valuations to make ‘equity injection’ decisions;
- property (or business) values are subjective enough, and difficult enough, to determine in normal markets. They become ever more difficult to determine and subjective the more uncertain and volatile are the markets for said properties; and,
- where property values must be determined in poor markets, the valuation concept of ‘blockage’ has to be considered. That is, it is one thing to put one property on a market where ‘normal market conditions’ prevail. It is quite another thing to opine on the value of 500 or 5,000 (or more) properties where an abnormal market prevails, and where one has to take into account what would happen if all those properties were introduced to that abnormal market at the same time – with unusual downward pressure on price.
The last point is something that not all persons opining on property or business value necessarily focus on or input into their value conclusions. This last point is also something that may have influenced the decisions made in Europe and America in 2008 – 2009 when mark-to-market accounting rules where changed. Consider carefully that changes in reporting do not impact market reality at a point in time.
The two audit firms that have been appointed to opine on the Spanish bank property values have a very difficult job. Potential arm’s length lenders or equity investors likewise will have very difficult decisions to make.
Stay tuned to this issue – it is very important both to the current Spanish economic dilemma, and also likely very important in the context of potential other country/financial markets contagion.
In the end, it may be that Spain will have to guarantee either loans or equity injections into its banks. If that proves to be the case, that will only come at a cost to Spain and exacerbate its economic problems.
Also see a May 11 Press Release issued by the International Monetary Fund, which reports IMF Managing Director Christine Lagarde’s positive statements on last week’s moves by the Spanish Government. Ms. Lagarde’s statements may be seen in coming weeks and months to be a theoretically sensible, but at the same time a practical non-starter from a Spain economic recovery prospective point of view.
Spain’s lack of cash in bank reforms falls short of investors’ expectations
Source: The Financial Post, Julien Toyer and JesDus Aguada (from Reuters), May 11, 2012
Reading time: 3 minutes
Spanish banks given 15 days to plan how to raise 30 billions euros or face nationalism
Source: The Telegraph, Louise Armitstead, May 11, 2012
Reading time: 3 minutes
Also read: Spain imposes drastic reform to clean up banks
Source: The Telegraph, May 11, 2012
Reading time: 2 minutes
IMF Managing Director Welcomes Spain’s Measures to Strengthen the Banking Sector
Source: The International Monetary Fund, May 11, 2012
Reading time: 2 minutes
Today’s ‘Speak For Themselves’ World Headlines
Why Read These Headlines: Save Time and Stay Informed. These Headlines have been personally filtered this morning from over 1,200 articles canvassing economic and resource news
Overview: Discusses European youth unemployment and its importance
Source: VOX Blog, Marco Annuziata, May 13, 2012
Reading time: 2 minutes
India witnesses huge growth in FDI in steel industry
Overview: Discusses growth in Foreign Direct Investment in India’s steel industry
Source: Commodity Online, May 13, 2012
Reading time: 4 minutes
Today’s Unabridged E-mail includes four other ‘Speak For Themselves’ Headlines dealing with the following topics:
- Youth unemployment importance;
- Current German Government prospects;
- China’s prospective economic models; and,
- China’s and potential world deflation.
Excellent Gold Slideshow!
Why Read: Because this 58 slide presentation is a very balanced overview of physical gold.
Featured Article: On May 11 Business Insider published a lengthy presentation on the history of physical gold, its price drivers, what selected individuals think about it going forward, and what U.S. Federal Reserve Chairman Bernanke thinks of it.
Commentary: If you own, or are contemplating owning ….. (continue reading)
Commentary reading time 1 minute.
Referenced article(s) reading time 10 minutes, thinking time much longer.
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