Spain’s economy could shrink as much as 12.4% this year if its coronavirus lockdown lasts 12 weeks, before staging a vigorous recovery of at least 5.5% in 2021, the Bank of Spain said 

The Spanish central bank said the disruption suffered by the economy was, as in other countries, of «considerable severity», although there was still great uncertainty as it charted various scenarios depending on the length of the lockdown.

Its best-case scenario, based on the assumption that measures to prevent mass closure of businesses and lasting unemployment work out and the lockdown that began in mid-March lasts eight weeks, pointed to a 6.8% contraction.

The central bank said that tourism, which accounts for around 12% of Spain’s gross domestic product and 13.5% of all employment, would be particularly hard-hit by the pandemic.

«The high contribution of tourism to GDP and employment, in a context where these sectors are suffering disproportionately from the consequences of the pandemic, contributes to the fact that the prospects of the Spanish economy have been particularly affected,» it said.

If companies’ liquidity shortages turn into solvency problems in an eight-week lockdown, which the central bank saw as the most probable outcome, the Spanish economy could contract 9.5% this year, or 12.4% if the lockdown lasted 12 weeks.

In its worst-case scenario, it expected the unemployment rate to hit 21.7% this year, easing to 19.9% in 2021.

According to the International Monetary Fund, the euro zone economies should contract by 7.5% in 2020, forecasting an 8% contraction in Spain.

The Bank of Spain said that, in any case, an upturn was expected to begin in the second half of the year, leading to a «remarkable recovery» in 2021, with a projected growth of between 5.5% and 8.5%.

The central bank also predicted a budget deficit of between 7.2% and 11% of gross domestic product in 2020, improving to 5.2%-7.4% of GDP the following year. It said Spain’s debt-to-GDP ratio would rise to 122.3% in 2020 in the worst-case scenario.

Original Story: The Guardian| Jesus Aguado and Emma Pinedo (Reuters)| 
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Edition: Prime Yield

The European Central Bank have held talks with counterparts in the European Comission about creating a eurozone bad bank to remove billions of euros in toxic debts from lenders’ balance sheets, the Financial Times reveals.

According to the newspaper, the plan to deal with debts left over the 2008 financial crisis is being pushed by senior ECB officials, who worry the coronavirus pandemic will trigger another surge in non-performing loans (NPLs) that risks clogging up banks’ lending capacity at a critical time.

However, the idea faces stiff opposition within the European Commission, where officials are reluctant to waive EU rules requiring state aid for banks to be provided only after a resolution process imposes losses on their shareholders and bondholders.

«The lesson from the crisis is that only with a bad bank can you quickly get rid of the NPLs,” Yannis Stournaras, governor of the Bank of Greece and member of the ECB governing council, told the Financial Times. «It could be a European one or a national one. But it needs to happen quickly».

Greek banks have by far the highest level of bad loans on their balance sheets of any eurozone country, making up 35% of their total loan books — a legacy of the 2010-15 debt crisis. They have cut their bad loans by about 40% in four years, under heavy pressure from the ECB. But plans by Greece’s big four lenders to sell more than €32bn of NPLs — almost half the total in the country — are likely to be disrupted by the coronavirus crisis, and Mr Stournaras said the best way to quickly fix their balance sheets is now via a bad bank.

ECB officials have also held talks with the commission’s department for financial stability and capital markets. Senior EU officials have pushed back on the idea, arguing there are better ways to tackle toxic loans, but declined to give further details.

The high-level talks were in their infancy and had been premature, said people with direct knowledge of them.

However, people following the discussions inside the commission did not rule out their resuming at a later stage of the pandemic.

Andrea Enria, chair of the ECB’s supervisory board, proposed the idea of an EU bad bank in early 2017 when he was still head of the European Banking Authority. His idea was blocked by Brussels’ officials citing state-aid rules — but he is now trying to get the plan off the ground again, said people briefed on the matter. The ECB declined to comment.

Total NPLs in the biggest 121 eurozone banks almost halved in four years to €506 bn, or 3.2% of their loan books, by the end of last year. But Greek, Cypriot, Portuguese and Italian banks still have NPL ratios above 6%.

In March, the commission adopted a temporary relaxation of state-aid rules and has since waved through billions of euros in emergency government relief measures. Brussels is also finalising plans alongside member states to allow countries to inject equity directly into struggling businesses, though in return they will be restricted from paying dividends or bonuses while in receipt of state aid. 

Proponents of the bad bank idea hope to make it acceptable under state-aid rules by proposing that the toxic loans would have to be sold into the market after a fixed time period, with the power to recoup any losses from the lenders themselves.Spain, Ireland and Germany all set up state-backed bad banks after the 2008 financial crisis to deal with sudden increases in toxic bank debt. But since then, the EU has introduced the bank recovery and resolution directive, which restricts governments from setting up bad banks except as part of an official resolution process.

Original Story: Financial Times| Martin Arnold and Javier Espinoza
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Edition: Prime Yield

Analysis of recent bank reviews by ratings agency Fitch – in banking markets previously identified by GlobalData as vulnerable to COVID-19 disruption – shows that Spanish and Italian lenders are most likely to suffer from the ongoing market turbulence, writes Katherine Long, an associate analyst for GlobalData Financial Services, Retail Banking.

As Covid-19 spreads throughout the world, GlobalData identified that banking markets in Europe, China, and Canada are most likely to be disrupted.

Similarly, in the last month, a large number of ratings actions have been taken against lenders in these countries by Fitch. Most actions have resulted in either downgrades to long-term issuer default ratings, a negative outlook, or ratings watch. 

And while it was stressed that the likely deterioration in asset quality would occur for virtually all reviewed banks, there were noticeable differences in each market. 

GlobalData has shown that the Spanish and Italian banking markets have seen the largest number of warnings issued while also currently having the lowest default ratings.

Spanish banks such as CaixaBank, Banco de Sabadell, and Bankia remain overexposed to various risky sectors. 

Conversely, lenders such as Ibercaja, Abanca, Grupo Cooperativo Cajamar and Liberbank have been plagued by low profitability, asset quality pressures, and poor capital positions.

Meanwhile, banks in Italy such as the famous Banca Monte dei Paschi di Siena, as well as Banca Carige and Iccrea Banca, enter the Covid-19 crisis already weakened. 

Poor asset quality and lack of profitability had already damaged their ‘commercial effectiveness.’ Other banks such as Banca Popolare are too regionally centric, making them vulnerable to local industries such as tourism. 

Similarly, German banks such as Deutsche Bank and Commerzbank, while stronger than banks in Italy, have also been going through a period of restructuring, leaving them in a weak position as well before the effects of Covid-19 have struck.French and Canadian banks, however, such as BNP Paribas, HSBC Canada, and Bank of Montreal, while considered robust, are still expected to suffer worsening asset quality. This is particularly the case if they are overexposed to sectors such as oil and gas, equity investments, and residential property, which are expected to suffer this year.

Original Story: Leasing Life |Verdict Staff
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Edition: Prime Yield

Spain’s government outlined its burden-sharing scheme for banks as part of state-backed credit lines to help companies limit the impact of the coronavirus crisis, releasing an initial tranche of €20 billion.

The measures are part of a total of €100 billion in state-backed credit lines approved in late March, embedded in an unprecedented, wider €200-billion package.

«The government hopes that these measures will help companies to better weather the negative effects triggered by this health emergency, » government spokeswoman Maria Jesus Montero said.

With nearly 205,000 coronavirus cases and 21,300 deaths, Spain is Europe’s worst-hit country.

Banks have been awaiting the details of credit lines before starting to grant loans to businesses that have already started to temporarily lay off thousands of employees to withstand a near standstill in activity.

As part of the scheme, the state will guarantee around 80% of unpaid loans to self-employed workers and small and medium-sized companies, which represent the bulk of Spanish businesses. These two categories will receive half of the first tranche in credit lines.

The guarantees will cover new or renewed lending but not restructured loans, as had been demanded by lenders.

For bigger companies, the guarantees would cover 70% of potential losses from new loans and 60% of unpaid renewed credit lines. The guarantees would be for up to five years.

Montero said that interest price policy on loans had not been agreed with banks as «the biggest problem is not interest rates but sharing the risk».

In Germany, for example, the government is offering an unlimited volume in loans through the KfW bank that was founded to finance the country’s rebuilding after World War Two.

The loans are 80% guaranteed by the government for larger companies with more than 250 employees, and up to 90% for smaller companies.

European governments are scrambling to put together spending packages to mitigate the blow from the coronavirus pandemic, while the European Central Bank has promised emergency action to buy more than a trillion euros in bonds to support the economy and is offering loans for banks to pass on to small businesses.

Original Story: Reuters |Jesus Aguado and Emma Pinedo, Belen Carreño and Tom Sils 
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Blackstone and Cerberus are losing money from the residential portfolios acquired from Santander and BBVA, which have generated millionaire losses to the funds. On the contrary, Lonestar, however, is obtaining benefits of €6.4 million from the assets it bought from Caixa Bank.

Quasar Investments, the society established by Blackstone, acquired dwellings, land and non-performing loans from Santander for a net value of €10 billion, in a deal that generated red numbers of €714 million in the last year’s accounts. Santander still co-owns 49% from the company and had recorded losses of €350 million.

The losses shared by Cerberus and BBVA stood around €48 million, even though it wasn’t as pronounced for the entity, since it only holds 20% from Divarian, the jointly created company.

Original Story: EJE Prime | NEWS
Photo: Site Cerberus
Edition & Translation: Prime Yield

Spanish banks could face billions of euros in compensation claims if the European Union’s highest court delivers an unfavourable verdict on how they’ve been setting mortgage rates.

The EU’s Court of Justice is examining whether banks are sufficiently transparent with customers about why they were sold mortgages with interest rates based on a Spanish central bank index rather than the more widely used Euribor, which often resulted in thousands of euros in extra costs.

CaixaBank SA is the most exposed lender, with €6.1bn of outstanding mortgages linked to the Spanish central bank’s Loan Reference Index, or IRPH, followed by Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA. In an extreme scenario, banks could be forced to repay clients as much as €44bn, according to Goldman Sachs Group Inc.

While the case was brought by a Bankia customer, the decision will influence how such claims will be judged across Spain in the future. Some one million customers in the country bought IRPH-linked mortgages, paying an average of €25,000 more than those who got loans based on Euribor, according to an estimate by the Association of Financial Users, or Asufin.

A negative ruling for the banks would go against a 2017 verdict by Spain’s Supreme Court, which found that selling the IRPH mortgages couldn’t be abusive because they were tied to an official index.

IRPH is more difficult to calculate than Euribor because it also includes fees and credit risk. Marketed as a more stable option, the Spanish index has consistently produced higher rates for customers since it was created in the early 1990s. But the gap between the two indexes widened after 2008, when the European Central Bank began to drive down its benchmark rate.

A worst-case scenario for the banks would be a verdict that is retroactive, meaning it would include already-matured mortgages and past interest payments on existing contracts. About €108bn of home loans linked to IRPH have been sold since 1999, according to credit rating company DBRS. In September, Advocate General Maciej Szpunar of the EU court delivered mixed messages on the IPRH case in a non-binding opinion. He found that Bankia had been sufficiently transparent with the client, but also concluded that the use of the IRPH falls within the remit of the EU’s rules on unfair terms and therefore Spanish courts can consider it abusive on a case-by-case basis. “The opinion increases the likelihood that the ECJ will rule against the use of the IRPH, which would raise the number of consumer claims against banks for a lack of transparency on the sale of IRPH-linked residential mortgages, exposing Spain’s lenders to heightened litigation risks,” Moodys Investor Services senior analyst Alberto Postigo wrote in September.

Although the EU court follows the findings of its advocates general in most cases, there are notable exceptions. In 2016, it said banks must give back billions of euros to customers who paid too much interest on home loans pre-dating a May 2013 Spanish ruling on so-called mortgage floors. The decision was at odds with the non-binding opinion five months earlier, which had favoured the banks.

Original Story: The Gulf Times | Bloomberg 
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Edition:Prime Yield