A new credit crisis is emerging in Spain with the country’s banking system and major companies facing lock-out by other European banks.
Spain Treasury Secretary, Carlos Ocana, revealed the freeze in comments made in northern Spain.
Mr Ocana said the credit freeze affecting Spanish banks and corporations was “definitely a problem”.
A senior banker also made similar comments and the Financial Times reported that Francisco González, chairman of BBVA, Spain’s second-biggest lender, as saying: “For the majority of companies and Spanish financial firms, international capital markets are closed”.
Figures released last night showed that Spanish banks are borrowing record amounts from the European Central Bank: 85.6 billion euros ($US105.7bn) last month.
This was double the amount lent to them before the collapse of Lehman Brothers in September 2008 and 16.5% of net eurozone loans offered by the central bank.
It was up from 74.6 billion euros, or 14.4% of the net amount lent to all banks, in April; a definite sign of the liquidity strains being felt.
The euro rose despite the news as investors looked at the sunny side of life (and ignored the downgrade of Greece to junk status).
But the news will test the resolve of the EU and the eurozone to intervene quickly to stabilise the continent’s 4th biggest economy before it riggers another major credit crunch.
And the size of the problem cannot be under-estimated. According to the Bank of International Settlements, French and German banks have more than $US400 billion in loans and credit advanced to both countries ($248 billion for France, German banks $202 billion). This dwarfs the exposure to much smaller Greece.
Eurozone banks have more than $US700 billion of exposure to Spain.
That would put a big hole in the standby support package of 750 billion euros (around $US900 billion).
News of the spreading freeze came as Moody’s ratings agency downgraded Greece to junk status.
Spain is AA plus/negative, cut last month and in April from Triple A by Fitch and Standard & Poor’s.
Other figures overnight showed Spanish industrial output is now weakening, while unemployment in April was a chilling 19.7% and heavily concentrated in people under the age of 40.
The comments saw Spanish Government bonds sold off sharply as the government attempted to downplay German media reports that it was talking to other eurozone countries about help.
Mr Ocana used a business conference in northern Spain to publicly deny German newspaper reports that Madrid was negotiating a Greek-style financial aid package with Brussels.
"Spain does not need additional financing from any international institution. The rumour is false and I deny it," he said, in a story from Reuters.
The big problem for Europe is that Spain is facing a deadline; the country needs to refinance 16.2 billion euros of bonds in July.
If Spain can’t continue financing itself, the country will have to use the 500 billion euro standby package nailed down last week by the EU and eurozone and now coming into being (with a 250 billion top up from the IMF, if needed).
The European Central bank has so far done most of the support by buying mostly Greek sovereign debt from banks wanting to sell. It would be the most logical conduit for supporting next month’s bond refinancings, if needed.
The FT and Reuters reports that the liquidity freeze is affecting Spain’s sick domestic savings banks and small banks but not the country’s biggest financial institutions, such as BBVA and Santander, which is Europe’s biggest bank.
Spain matters; unlike Greece. Not only is it the area’s 4th biggest economy, but the extent of bank exposure elevates it to "the big one". A crisis there would plunge other weak economies such as Portugal, Italy and Ireland into crisis, as many pundits have been predicting.
The latest quarterly report from the Bank of International Settlements tells us "As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain).
"Together, they had $US727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece," the BIS reported.
That’s a lot of incentive to help Spain quickly, before the rest of the world catches cold.
