Spain must learn from Irish crisis

Irish economists have advised Spanish authorities awaiting the results of stress tests on their banking system to “imagine the worst and double it”.

Like Ireland, Spain sought a bank bailout after being felled by a real-estate crash. Now, just as the Irish did, the Spanish are awaiting the results of outside stress tests gauging the size of the hole in the banking system.

Eoin Fahy, an economist at Kleinwort Benson Investors in Dublin, said: “Think of the worst possible scenario on banking losses: then double it. Adopt the most conservative assumptions.”

Irish analysts have wrought three lessons from the banking crisis. First, quickly present an accurate estimate of the bad loans. Second, force banks to face up to losses, possibly through the creation of a so-called bad bank. Third, share as much of the loss as possible with bank bondholders.

“Spain should face the economic reality, even if they have to value property loans at discounts of 40, 60 or even 80%,” said Alan Ahearne, former economic adviser to Brian Lenihan, the finance minister who presided over Ireland’s response to the near-collapse of its financial system. “If the real losses aren’t faced up to, who’s that going to fool?”

Spain’s government already ordered banks to set aside provisions equivalent to 45% on the nation’s €307bn book of loans linked to real-estate developers, economy minister Luis de Guindos said.

By bringing in outside experts to examine the banks, signs are that Spain is drawing some lessons from Ireland’s mistakes.

After agreeing to a bailout of as much as €100bn for its lenders, the Spanish government is awaiting the results of an audit of the banks by international firms Roland Berger Strategy Consultants and Oliver Wyman.

The International Monetary Fund said in a report last week that Spain’s banks need at least €37bn to weather a contracting economy.

With bank costs escalating, investors shunned Irish sovereign debt and forced the nation into a bailout. As part of the rescue agreement, the Central Bank hired BlackRock to assess the capital shortage at the banks. Based on those tests, the banks needed an additional €24bn.

“Spain has learned one key lesson,” Fahy at Kleinwort Benson Investors said. “Bring in outside, completely independent people to assess the losses.”

One key difference between Ireland’s and Spain’s banking crises is that real estate loans peaked at 77% of the Irish economy versus 29% in Spain.

The Spanish bailout is also 9% of their economy versus €63bn (or 43%) in Ireland.

Yet the core issues are the same, say Irish analysts, who expect Spanish banking woes to push the nation into a full bailout. Spain’s 10-year bond yield rose to a euro-era record of 6.998% currently. Ireland sought a full bailout when yields reached 7.99% on Nov 19, 2010.

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