Slow and Steady Spain

Late Wednesday, the Spanish government took another step (of what will most likely be many) to right the country’s banking woes—announcing it would convert a €4.5 billion loan to the nation’s fourth largest bank into a 45% equity stake. Likewise, the government is expected to inject another €10 billion in capital in exchange for contingent convertible bonds—potentially upping its stake in the troubled lender. In our view, this measured move likely alleviates a bit of uncertainty and suggests additional action to aid troubled lenders in the future.

We don’t think this puts an end to any future fears on this score. However, the reality is Spain’s problematic real estate debt has been widely known and telegraphed to markets for several years now. Specific to Spanish banks—the government has proposed various measures before. After all, Spain’s banks have been near the center of concerns tied to the nation’s economic downturn. But earlier government plans targeting resolutions seemingly didn’t quell all concerns or issues. Previously, the government focused on consolidating weaker banks and requiring them to raise fresh capital to buffer against potentially bad real estate loans. (The bank semi-nationalized Wednesday was created in 2010 by the merger of seven cajas—regional savings banks.) So the path of semi-nationalization and the infusion of new taxpayer capital Wednesday is a slightly new direction for Spain.

Full details of Spain’s plan to revamp the financial sector are forthcoming, so we won’t speculate here. However, should some of the changes rumored to be included come to pass, it likely further helps clear the air of uncertainty surrounding Spanish banks.

But what it likely won’t do is suddenly radically accelerate Spain toward an all-clear sign. As German Chancellor Angela Merkel said recently: “Only one thing is and remains sustainable: accepting that overcoming the crisis will be a long and difficult process that will only be achieved if we attack the origins of the crisis, which are the horrendous debts and a lack of competitiveness in some European countries.” We wouldn’t say the two apply equally to all of Europe’s periphery, but we agree there’s no silver bullet to fix all that ails the weaker nations. Nevertheless, continued alleviation of uncertainty can be an ongoing positive factor.