The Spanish financial system is going to need less than half of the 100 billion euros that the EU will make available for its bailout. Taking into account mergers that are underway right now, 53.745 billion will be needed according to results from the latest stress tests performed Friday by the consulting firm Oliver Wyman.
That said, this is the amount that would be needed in the worst case scenario. The Secretary of State for the Economy, Fernando Jiménez Latorre said yesterday that only 40 billion euros will be necessary to clean up the financial sector. After considering the continual and frustrated attempts to reform the Spanish banking sector, the bailout Spain asked for in order to clean up its banks and the conditions imposed by the Memorandum of Understanding (MoU), Oliver Wyman's report concluded that 62% of the sector, composed of seven major banking groups, will not need aid.
This is a sign of strength. Santander leads the group, because in the worst-case scenario it will have 25.297 in capital reserves. BBVA, Caixabank, Kutxabank, Sabadell, Bankinter and Unicaja don't need aid either. In particular, Unicaja was the surprise inclusion in the group. The Spanish financial sector has survived a strict assessment that wasn't applied to other European firms, but ultimately helps Spain in that it boosts the banks' credibility and clears up pending doubts about their strength. Of the seven banks that will need help from the EU in order to address their capital needs, Bankia could need up to 24.743 billion euros, which would be around half of all total aid.
Still, this amount could drop after accounting for tax credits, surpluses, stock sales or sloughing off toxic real estate assets after the bad bank is created. For the most part, nationalized banks need to boost their capital requirements. As a group, they would need around 53 billion euros according to Oliver Wyman.
Banks such as BMN are merging in order to survive. Banco Popular needs 3.233 billion in aid, although it has announced that it will raise this capital using its own resources. Now that the stress test results have been published, the next step is to ask if Spain can finally complete an overhaul of the sector and avoid past mistakes.
Spain asked for 40 billion euros to clean up the banking sector. The Bank of Spain could have arrived at this figure, and the cost would have been less. The competency and professionalism of Spain's central bank, praised by the IMF, is not in question. But the independence and judgment of the Bank of Spain has been attacked by government interference (as much this administration as the former). For this reason, Oliver Wyman's results shouldn't be taken for granted even though it looks like they are being well-received by the markets.
Mostly because a long road lies ahead, which implies that the sector, companies and the Spanish people will have to make big sacrifices. It is important to point out that the effort that the banks are going to have to make in order to increase capital reserves will weigh down Spain's economic recovery, because credit won?t flow freely for a long time.
