Spain's Caja's may be hiding mortgage losses

Spanish savings banks may be hiding losses on home loans by taking non-performing mortgages out of securitized transactions, according to CreditSights Inc.

By carrying the bad loans on their own books the so-called cajas sidestep downgrades to their mortgage-backed securities, the independent bond research firm said in a report. The regional lenders helped fuel the nation’s real-estate bubble, which burst after the collapse of the U.S. subprime market.

CreditSights follows a sample of 143 Spanish residential mortgage-backed securities collateralized by 136 billion euros ($170 billion) of loans, with about 45 percent originated by cajas. While the savings banks give little information about the state of their loan books, investor reports on the performance of the securitized debt suggest asset quality is weaker than at commercial lenders, CreditSights said.

“Caja-originated mortgages are performing much worse than those extended by Spain’s commercial banks,” analysts David Watts, John Raymond and Hana Galetova wrote. By buying mortgages out of the pools “they could have been artificially reducing the level of bad loans in RMBS while simultaneously undermining the quality of the cajas’ own assets,” they wrote.

A comparison of loans originated by commercial banks and cajas shows that delinquencies in the savings banks’ mortgages have been higher than those of the commercial banks for at least four years, the report said. Falling incomes caused by government austerity packages “would no doubt precipitate further rises in delinquencies,” CreditSights said.

For the cajas, the proportion of mortgages more than 90 days delinquent or repossessed peaked at 4.2 percent in the third quarter of last year and is now 3.7 percent. The rate of serious delinquencies for commercial banks was 2.3 percent in the third quarter and has now “leveled off” at 2.6 percent, according to CreditSights.

“By buying the loans out of the mortgage pool, the cajas would be taking those weaker loans onto their own books,” according to CreditSights. “The current 3.7 percent serious delinquency rate may flatter the performance of the cajas mortgage books and underestimate their potential losses.”

Spain debt shows gap between perception and reality

Spain's syndicated 10-year bond issue drew solid demand on Tuesday, the country's latest well-received visit to the market suggesting doom-mongering on the Treasury's solvency is overblown.

For the past two months some market rumblings put Spain on the verge of financial bankruptcy and suggested, once it had sunk below the waves, it would drag the euro zone and its single currency down with it.

That Spain may face a long period of low growth is beyond question as the collapse of its key construction industry is forcing the country to reinvent its economic base, but there is little to suggest short-term problems with debt payments.


GENERALIZED VIEW

* The perception of Spain as verging on the brink stems from a generalised view of the whole southern-European region.

* After Greece was forced to go the European Union cap in hand in April, Portugal, Italy, Greece and Spain were slammed as the zone's Achilles heel with Spain its most dangerous offender.

* The euro zone's fourth largest economy, Spain has a gross domestic product of more than four times that of Greece and, if it were forced to search for a similar bailout, the potential financial strain would be disastrous for the region.

* The perception gap between Spain and the zone's safe haven Germany is reflected in the 10-year bond with spreads widening last month to a record level since the euro began of around 238 basis points from closer to 80 basis points in April.

* The Greece crisis deepened on concerns it could not meet a bond redemption in April and it is this precedent that is haunting Spain, which faces a debt pay off of 16.2 billion euros ($21.74 billion) above its normal bill payments late July.


REFORMS, MEASURES FAIL TO CONVINCE

* The government's 15-billion euro austerity plan, much-anticipated labour market reform and restructing of its savings banks have done little to calm markets.

* Spain's public deficit ballooned to 11.2 percent of gross domestic product in 2009 from a surplus of around 2 percent in 2007 after multiple stimulus measures and a shrinking tax base.

* Spain, which hasn't defaulted since the civil war half a century ago, has a good history of fiscal prudence and has one of the lowest debt-to-GDP ratios in the euro zone at around 55 percent.

* Economists are concerned that the government's promise to slash the deficit to 3 percent of GDP by 2013 is based on unrealistic growth forecasts and the economy could be heading for a new recession before the end of the year.

* All issues, whether a new 10-year syndicated bond or a 3-month Treasury bill, continue to be met with concerns over Spain's solvency. But each issue has seen healthy demand, partly as the Treasury has been forced to offer hefty premiums to offset concerns.

* Higher coupons and higher debt levels in 2010 could raise financing costs by around 5 billion euros in 2011, the Treasury Secretary has said. Moody's said they may downgrade Spain's sovereign debt rating on concerns, among others, of rising financing costs, but the government says the higher payments are manageable.


LOCAL VS FOREIGN DEMAND

* Popular wisdom holds it is only domestic demand that is keeping the market going, as Spanish banks fight for collateral to finance themselves with the European Central Bank.

* But figures from the Treasury show sell-off by non-domestic investors has not been wholesale and non-residents remain deeply involved in the Spanish debt market.

* In May 2009, non-residents held around 47 percent of Spanish sovereign bonds but this had dropped to around 42 percent by May 2010. More recent figures are not available, but sources suggest it stands at around 60-40.

* Tuesday's 10-year syndicated bond sale was well received both in an out of Spain, a source close to process said. A 3-year bond auction June 10 saw non-resident participation of over 50 percent, the same source said.

Spain shrugs off bad economy, launches bull runs 


PAMPLONA, Spain — Spain shrugged off its economic woes Tuesday with tens of thousands of Spaniards and foreigners jamming a historic city plaza and spraying each other with wine as a firecracker rocket blasted off to launch the famed San Fermin bull-running festival.

The nine-day street drinking party got under way at midday with the traditional shout from the city hall balcony of "Viva San Fermin!," followed seconds later by the firing of the firecracker known as the chupinazo. On Wednesday, daredevils will race just ahead of huge bulls running along Pamplona's cobblestoned streets, and gorings are virtually assured.

The rocket was the signal to the revelers to erupt into the party mode that dominates Spain through August. Crowds dressed in the festival's traditional white shirts and pants with red sashes sang and whooped while drenching each other with sangria, cheap wine and champagne.

Though the tourist count is down in Pamplona this year and merchants are complaining of low sales as Spain struggles with the European debt crisis and 20 percent unemployment, David Marcilla said he didn't care after a woman dumped a huge bucket of water on top of him from her terrace in a third-floor apartment.

"There's a crisis in Spain, but there isn't today in Pamplona and everyone is partying," said Marcilla, 16, his white shirt already stained pink by wine.

John Lawlor, 25, was trying to decide which day he would pick to run in front of the bulls for his first time, but insisted his dash would be short.

"I have a bladder condition," the British college student joked as he swilled from yet another can of beer. "Have to stop frequently."

The party's start was marred when Basque separatists prohibited from displaying their flag on a huge stage raised one into the air from the crowd and unfurled a banner demanding that terrorists convicted of bombings and killings be moved to prisons closer to their relatives.

The event witnessed by an AP photographer prompted police officers to move into the sea of people packing the plaza, swinging their batons. Fistfights also broke out between supporters of the ETA Basque separatist group and Spaniards opposed to the Basque independence movement.

Some in the crowd responded by hurling bottles of beer and champagne at officers, and police beat people in the crowd, according to witnesses and photos by news photographers that showed the clashes.

"The pushing escalated and the cops started coming in and beating people with batons," said Damien Woodfull, a 20-year-old Canadian university student from Windsor, Ontario.

New Zealand dairy farmer Helen Campbell, 23, said she was hit by a bottle in the head as riot police pulled people from the crowd, but she was uninjured.

An Associated Press reporter saw officers removing the Basque flag from the plaza, and four carried out one man who appeared to be injured or unconscious.

Police at the scene declined comment, and Pamplona police spokesman Antonio Iberni said he was unaware of any disturbances or injuries. He added that if people had attempted to raise a banner in support of ETA prisoners, officers would have waded in to remove it.

But the party resumed quickly after the melee, with television images showing masses of red and white dressed partiers swaying back and forth in the square and roaring "San Fermin!" and "Ole!" as the rocket blasted off.

"There's so much wine on the ground you could get drunk by drinking it off the floor," said Samantha Arnold, a 25-year-old pharmaceutical saleswoman from Australia.

In an almost laughable bid to try to keep the noise level down during the fiesta known for 24-hour street partying, Pamplona town hall on Monday banned street vendor sales of vuvuzelas, the droning plastic horns so popular at World Cup matches in South Africa.

San Fermin's first bull-run starts at 8 a.m (0600 GMT) Wednesday, when hundreds of people race ahead of six fighting bulls and six bell-tinkling steers — meant to keep them in a tight pack — that charge down the 930-yard (850-meter) course from a holding pen to the northern town's bull ring.

In the evening, the bulls will be killed in the bull ring, and their meat gets served up in Pamplona's restaurants.

Dozens of people are injured each year in the morning runs. Most get hurt after falling, but some are gored and trampled by the beasts.

Last year's festival saw the first goring death in nearly 15 years.

The fiesta became a big international event after Ernest Hemingway wrote about it in his 1926 novel, "The Sun Also Rises."