Giant leap not small steps required to save Spain’s banks, says F&C’s Ted Scott

Ted Scott, director Global Strategy at UK manager F&C believes an EU-IMF bailout will be required before the end of 2012 to stop the Spanish banking and broader financial crises.

After three failed attempts to address the problems of the ailing bank sector, the government has introduced new and more far reaching measures in the new Royal Decree of May 11th, that it hopes will restore confidence to the banks and financial markets. These new measures represent a step in the right direction towards solving the banking crisis in Spain. However, the country does not require a step, it needs a giant leap. The reaction in the market, with bank prices on the Spanish stock markets falling sharply, reflected the general view that this was, once again, too little and too late. In the note Ted outlines the reasons it has fallen short.

Like Ireland, Spain’s banks have been brought to their knees by a huge, speculative real estate bubble to which the banks had, and still have, large exposure. The decline in the property market has accelerated with both commercial real estate and house prices suffering large falls in value. Given that Spanish property values have only fallen about half as much as occurred in Ireland it can reasonably be expected that prices have a lot further to decline.

Spain has not learnt the lesson from Ireland, which had its own banking crisis. Spain’s strategy has been tardy and reactive and has consistently failed to acknowledge the new reality as the economic situation has rapidly got worse. Like Ireland, the Spanish government will probably be forced to pour more money into the banks before being prevailed upon to seek assistance from the Eurozone bailout fund and the IMF. A bailout from the EU and the IMF is likely before the end of the year.

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