US, Greece and now Spain!

Wed, 26 May Pre-Open

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With Lehman's collapse many thought that the worst was over for the global financial crisis. Then, the multi-billion dollar bailouts were called the tip of the iceberg. Greece's sovereign default possibility added a new dimension to the debt crisis. But dare anybody believe that we are at the bottom of the default period! There are lot more skeletons that are yet to tumble out. And the banking crisis in Spain is the latest in the reckoning.

The International Monetary Fund's (IMF) report on problems in Spain's banking sector has triggered the concerns. The global financial authority has cited its discomfort over the consolidation amongst Spanish banks being too slow. As a result it believes that the entities in the sector will remain under pressure. In other words, if the assets do not form part of a well capitalized entity, the chances of default remains high.

Four Spanish banks plan to merge to form the nation's fifth-largest financial group. This group will have assets of more than 135 bn euros (US$ 166 bn). This is the result of Spanish regulators pushing ailing lenders to merge with stronger partners. However, as per Standard & Poor's estimates, the merger may cost the government as much as 35 bn euros. The last thing that the government needs in its attempt to reduce its budget deficit.

Mohamed El-Erian, whose runs the world's biggest bond fund PIMCO believes that stresses in Spain's banking system are intensifying concerns about Greek crisis . He says, "The minute you introduce strains in the banking system, there's always a fear that governments will be behind the curve and that you can get contagion."

The Bank of Spain has been urging mergers among the 45 banks that boosted mortgage lending in the past decade. They grew mortgage lending more than fivefold during Spain's 10-year housing boom. The government is seeking to shore up the weakest members and limit the cost of further bailouts. It has forecast its budget deficit at 9.3% of GDP this year. But is very unlikely to achieve the same. Spanish banks are as it is grappling with rising loan defaults after the country's worst recession in 60 years.

The worst part is that analysts in Span itself are not too sanguine about the economy's future prospects. In an interview to Bloomberg, the head of economic analysis in Madrid referred to the banks saying "Many of them are half-bankrupt. They have loans to property developers and mortgages that have turned toxic, and by mixing them with other savings banks the risk is diluted"!

Scary words indeed! We are not sure how long and how much cost will it take for the toxic assets to get wiped out. However, what we know is that the crises are far from over. Which economy will follow US, Greece and Spain is also a question that beckons. Will it be Portugal? Or for that matter, China? Only time will tell.