Small Banks in Spain facing Funding Problems

Spain's smaller banks are suffering due to the huge amount of property for sale in Spain that is not selling and the bad lending made is beginning to come home to roost

Smaller Spanish banks are losing access to the European repo market due to concerns Spain could be heading for a debt crisis along the lines of EU partner Greece, a top financial source in Spain said on Wednesday.
The repo market is wary of smaller Spanish lenders because of their real estate losses and because they can only offer Spanish government bonds as collateral.

The sharp rise in Spain's 10-year government bond yield since mid-May, to a peak of 4.66 percent from below 4.00 percent -- has brought it above the previous high of 4.50 percent hit just before the European Union agreed on a trillion-dollar financial safety net for eurzone countries in early May.

"The smaller Spanish banks cannot finance their positions in (Spanish) government bonds through the repo market outside Spain. This shows just how little appetite their is for Spanish government risk outside Spain," the financial source said.

"And the problem is these small lenders do not have access to the interbank market so basically they are tapping the ECB to cover short-term funding needs," the source said.

A source cited by Cinco Dias newspaper said however the bigger Spanish banks, particularly Santander and BBVA , are not having any major funding problems.

"Only the biggest Spanish banks are managing to get funding, but backed by bonds from other countries such as Germany. With our national bonds they are not managing to get anything," an executive at a Spanish savings bank was quoted as saying.

Santander and BBVA are well capitalised but also have a robust liquidity position. BBVA said in April it already had 80 percent of its funding needs covered for 2010.

"And the listed banks can always raise capital for emergency funding but the unlisted savings banks do not have this possibility," a leading Spanish bank analyst said.

Spain's 45 largely unlisted savings banks -- which account for 50 percent of the financial system -- are suffering the impact of a sharp downturn in the property sector after a decade-long boom and are immersed in a government-driven consolidation process aimed at restoring the weaker banks to good health.

Currently about 35 of the small lenders are involved in mergers with the clock ticking on government funding via the Fund for Orderly Bank Restructuring which expires at the end of June.

There have been signs for some weeks that Spanish banks were having to pay a premium to borrow in their domestic repo market as the broad repricing of euro zone sovereign credit risk raised lenders' concerns over the liquidity of the banking sector.

Other banks based in the stressed fringe euro zone countries -- Portugal, Italy, Ireland and Greece -- are also struggling to find any offers for term funding in the wholesale interbank market, said ICAP analyst Chris Clark. (see [ID:nLDE6581DX])

A credit analyst source told Reuters the issue for Spanish banks was not one of liquidity, as the banks have the ECB to rely on, but that it shows that in the current risk-averse climate smaller banks are being ostracised.

"The markets are almost shut for Spain," the international banking source said.

Market access could improve if Spain's Socialist government announces further austerity measures, the source said.

At the end of May, Spain's credit rating was cut by Fitch to AA+ from AAA, adding to fears the country was heading for a debt crisis from which it will need to be bailed out.

On Monday, the Treasury announced it would aim to raise between 3 and 4 billion euros on Thursday through the auction of a new benchmark, three-year bond.

Amid concerns that the auction might not be well enough bid, analysts have said they do not expect the auction to fail partly because Spanish banks such as Santander and BBVA would buy the bond if necessary because they have access to funding.