Reuters: Regulatory News: Irish lessons show Spain must do better on banks

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Irish lessons show Spain must do better on banks Jun 14th 2012, 13:22 By Steve Slater LONDON, June 14 | Thu Jun 14, 2012 9:22am EDT LONDON, June 14 (Reuters) - Madrid could do worse than look to Dublin for clues on how to fix the problems with the nation's banks and reassure investors, and how not to make all the same mistakes. Ireland shored up its banks in March last year, at its fourth attempt at trying to convince investors it had given lenders enough capital to halt an exodus of depositors and stabilise the industry. Its borrowing costs have since fallen - the only country to see that after a bail-out - its banks are slimming down, and losses are being swallowed. Dublin made several mis-steps on its path, stumbling along for two years with unrealistic estimates of the scale of the problem. Similar criticism is being levelled at Spain, which now has to build on an international bailout package to restore investor confidence and implement long-term structural reforms. "Spain and Ireland share one big problem; a big overextension of the loan book into property," said Gary McCarthy, CEO of QFT Advise, which provides analysis on financial markets. "The one thing in regaining confidence is to bite the bullet and stop flapping around with numbers that nobody believes. That is what has undone Spain," he said. Ireland's problems were more acute for several reasons; the loan book was bigger than gross domestic product, including massive toxic loans at Anglo Irish Bank; a steeper fall in property prices; and there was better provisioning in Spain to provide a cushion. But now losses have swelled in Spain, and Madrid is well behind the actions taken by Dublin. "The job they (Ireland) finally did convinced the market they had done the right things, taking out costs, cutting public expenditure and recapitalising the banks. You can't say the same about Portugal, Greece or Spain," one investment banker said. The yield on a 10-year Irish bond, or the return investors demand to hold its debt and perhaps the best indicator of confidence, is about 7.4 percent. That is still high, above the 7 percent level that most consider unsustainable, but is down from 9.2 percent at the start of 2011. Greece's has spiked to 29 percent from 12.5 percent at the start of last year and Portugal's is 10.8 percent. Spain's yield ominously hit 7 percent on Thursday, a euro-era high. It was 5.8 percent a month ago. BAILED OUT Spain is set to get up to 100 billion euros from euro zone rescue funds to recapitalise its banks after it asked for help on Saturday. It will specify precisely how much it needs once independent auditors report, probably next week. Ratings agency Fitch estimated Spain's banks could lose 295 billion euros if the losses seen in Ireland were applied, based on their 1.8 trillion euro loan portfolio. Spain's banks have raised or are in the process of raising 184 billion euros, indicating the bailout funds should be enough to cover the 295 billion euros shortfall once earnings from its healthier big banks are included. The scale of Spain's property losses are not expected to be as severe as in Ireland, but unemployment and growth prospects appear worse. Spain is the fourth euro zone country to need a bailout and poses a much greater threat to the currency bloc due to its 1 trillion euro economy, six times the size of Ireland. Banks in both countries were hit by massive losses from the bursting of a decade-long property bubble in 2008. Spain is consolidating its banks, and expects to shrink the number of regional savings banks, or cajas, to about 10 from more than 40, but critics say more urgency is needed. Investors in Ireland had to be patient. A "bad bank" set up in 2009 to take all toxic assets and a guarantee for all deposits failed to fix its problems and stem a deposit outflow. Sentiment shifted in November 2010 after Dublin outlined a plan to recapitalise its banks days after an international bailout, though it took four months more until details were unveiled, pumping 70 billion euros into the banks after an independent assessment of their assets. Loans sold to Ireland's bad bank went at a 57 percent discount on average, more than doubling the "haircut" expected at the start, and it was not until BlackRock's independent audit of assets that markets were reassured. Spain has hired Oliver Wyman Ltd and Roland Berger Strategy Consultants to perform an assessment audit on bank assets to emulate that feat. TAMED TIGER Ireland's plan expects to have just two core lenders left by 2015 - Bank of Ireland and Allied Irish Banks, both part-nationalised. Its banks must sell 72 billion euros of loans, or a whopping 28 percent of their 255 billion loan book. Much of that will come from shrinking in overseas markets or quitting some altogether. The retreat has been a blow to Ireland, whose roaring "Celtic Tiger" economy had been the envy of most countries in the boom years. The public is unhappy at the scale of austerity and there are fears the shrinking by banks will cripple growth, but the reaction has been relatively muted. "The political and social cohesion in Ireland around these measures is more marked than in Greece or Spain. The political and social risk is much lower; notwithstanding the pain people are taking, they are being more pragmatic and moving on," one banker said. Spain is also being hurt by wider EU concerns, with its bailout coming just a week before Greek voters return to the ballot box this Sunday, with Greece's future in the euro zone at stake. Ireland is not out of the woods. Its GDP grew 0.7 percent last year, but unemployment rose to 14.8 percent and commercial property fell a further 12.4 percent last year, and house prices another 16.7 percent. "Capital could be eroded more quickly than expected if stresses intensify ... (which) could lead to greater losses than expected," the central bank said in an update on progress in March. That's a lesson that Madrid and indeed the rest of the euro zone should already have learned; even the gloomiest predictions can prove inadequate. Link this Share this Digg this Email Reprints

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