Toxic Debt Still Plagues Spanish Banks (and Taxpayers Will End Up Paying for It)

Years after Crisis Was “Solved.”

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Europe’s banking authorities are finally beginning to pile pressure on poorly performing banks to clean up their books, something that should have happened a long, long time ago. But as is often the case with European banking regulation, there’s an elevated risk of unintended consequences.

If a bank with a deeply compromised balance sheet is forced to report its loans that have gone bad — the hidden piles of toxic “assets” — at prices that reflect their real value (rather than the illusory prices the bank arrived at with its mark-to-model formula), that bank could suddenly find that its capital has gone up in smoke.

This is more or less what happened with Banco Popular, the mid-sized Spanish bank that went under in June last year. No matter how creative the rescue plans its management came up with — including spinning off a bad bank called “Sunrise” — Popular simply couldn’t find a viable way of disposing of its nonperforming loans without crippling its financial health.

A similar thing appears to be happening with Spain’s fifth largest bank, Banco Sabadell, the Spanish bank that has grown the most in relative terms since the crisis. It has more than doubled in size in the last ten years (from €78.7 billion in assets in 2008 to €173.2 billion in 2017), following the acquisitions of Banco Gallego, Banco Guipuzcoano, Caixa Penedès, and the bankrupt savings bank Caja de Ahorros del Mediterráneo (CAM).

Now it has immense difficulty ridding itself of the impaired assets it acquired when it took over CAM in 2012. But unlike Popular, Sabadell is getting a massive helping hand from Spain’s government.

As part of the acquisition of CAM, it was agreed that Spain’s Deposit Guarantee Fund (DGF) — the fund that’s supposed to guarantee all insured bank deposits in Spain — would cover 80% of the losses accrued on CAM’s €24 billion portfolio of real estate loans. Even before CAM became the property of Sabadell, the DGF injected €5.2 billion — all of it public funds — into CAM.

It was hoped that CAM’s own loan provisions of €3.9 billion, would cover the rest of the losses. But they didn’t come close. In 2014 the provisions were completely wiped out.

A year later, Sabadell asked the DGF for €825 million euros to cover 80% of its losses on CAM’s impaired assets for that year. In 2016, the total annual losses surged to €981 million euros. At the beginning of 2018, Sabadell presented its next bill, for the losses incurred in 2017. It amounted to €1.3 billion. It’s not hard to see the trend!

What is perhaps most surprising is that this is all happening at a time when Spain’s real estate sector is recovering from the crisis. Real estate prices are rising, yet so, too, are the annual losses on the sale of CAM’s assets.

Based on calculations the DGF published in 2017 (with data from 2016), the total forecast losses of the still-covered portfolio could amount to as much as €7.3 billion, of which the DGF would have to cover almost €6 billion. The remainder would be borne by Sabadell. That’s on top of the more than €8 billion of losses already accrued over the last five years.

In other words, by the time this is all done and dusted, well over €10 billion of public funds will have been spent to fill the gaping balance sheet holes left behind by Sabadell’s sale of CAM’s toxic assets.

Some of those assets include loans for real estate projects of a highly dubious, if not fraudulent, nature. According to an investigation by the Bank of Spain, large parcels of land in Valencia, Catalonia, Murcia and Andalucia were sold at insanely inflated prices. From an initial investment of €594 million, 11 real estate projects funded by CAM generated losses of €467 million (78%), of which €405.6 million have been deemed unrecoverable.

This week the judge presiding the case, Carmen Lamela, ruled that the statue of limitations has unfortunately elapsed. As tends to happen with cases of white collar crime in Spain, the accused were cleared — not because they’d been found innocent but because the wheels of justice moved too slowly for a judgement to be reached.

Most of the losses those dodgy loans racked up will now be covered by the DGF. It’s not clear exactly how much Spain’s DGF has left in its coffers today. According to El Mundo, at the end of 2016 its total balance was €1.6 billion — far short of the €6.4 billion it’s supposed to have by 2024. But it could be much worse now: Since late 2016, the fund has had to shell out some €2.2 billion in guarantees on Sabadell’s toxic real estate assets.

Meanwhile, Spain’s second biggest bank, BBVA, is contemplating selling its own stash of guaranteed dodgy assets, which it inherited from its acquisition of bankrupt Catalan savings bank Unnim in 2012. That would mean even more money flowing out of Spain’s deposit guarantee fund.

What happens if the DGF itself, whose primary purpose is to cover insured bank deposits, runs out of funds? The answer is  predictable: the government steps in with another taxpayer-funded infusion, which it will try to hide with yet more creative accounting while Europe’s political and monetary authorities steadfastly look the other way.

This is all happening because the ECB is finally prodding banks in the Eurozone to unload their bad loans. But the move comes with big risks attached. It could result in big losses and force banks to raise new capital – no mean feat with bank valuations so low.

How many more Spanish banks are in a similar position to Sabadell? If a country like Spain, whose banking ills were supposed to have been remedied many moons ago, is struggling to cope with this process, just imagine how Italy, whose perennially teetering banks are home to almost one-third of the Eurozone’s entire stock of non performing loans, will fare at the same game! By Don Quijones.

One solution in Italy’s banking crisis is to merge ailing and bailed-out banks — to create bigger ailing banks? Read… Will Italy’s Banking Crisis Spawn a New Frankenbank?

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  18 comments for “Toxic Debt Still Plagues Spanish Banks (and Taxpayers Will End Up Paying for It)

  1. RepubAnon
    Mar 11, 2018 at 1:06 pm

    I’d suggest properly funding the tax collectors, guarding against corruption, and making sure the rich paid their fair share of the expenses involved in running a government would help. It’ll never happen – but it would help.

    • Mike
      Mar 17, 2018 at 10:23 pm

      Very, very funny. Maybe then Peter Pan can show us how to fly. Banksters captured US and EU governments…. None of those will happen.

  2. raxadian
    Mar 11, 2018 at 3:04 pm

    Spain sure is becoming popular. New taxes out if thin air, including a tax to solar energy and the infamous barber tax, lowering pensions, rising taxes, making the public pay for bankers disasters…

    Truly, Spain and Italy are the black sheep of the Eurozone.

    • Javert Chip
      Mar 12, 2018 at 9:10 am

      Ahhh! I love the stories of Spanish/Italian/Greek politicians fixing bad bank debt early in the morning!

      Everybody (except taxpaying citizens) knows moving faster on bad debt VASTLY lowers the final cost. However, politicians love the temporary economic high “easy lending” gives an economy. IF YOUR BANK HAS 8-10% NON-PERFORMING LOANS, IT’S ALREADY DEAD – IT’S SPENT 100%+ OF ITS CAPITAL AND IS DEPENDENT UPON TAXPAYER/DEPOSITOR BAIL-OUTS.

      Then if you have a Central Bank charging low interest rates, you have the perfect storm.

      • Steve clayton
        Mar 12, 2018 at 3:25 pm

        Hi Don Q, please can we have a league table of European banks npls

  3. Steve clayton
    Mar 11, 2018 at 3:41 pm

    Hi DQ, another great article. What makes me laugh is that you look at Sabadells last annual report and it goes on about how much lower loan losses are, improving balance sheet. Again the question id ask is surely the external auditors have to do a full review of the banks assets to show values are correct?

    • William Smith
      Mar 11, 2018 at 5:39 pm

      Auditors? Auditors? The GFC showed that all auditors are corrupt. Not a week goes by without a company going bust where an “auditor” has stated on the previous financials that the “company looks solvent for many years to come”. I was aware of one dot com company in the 90s where the prospectus and balance sheet were (at best) “a work of great creativity” and where a large auditing firm signed off on them prior to IPO. You probably also know of such companies as there were lots of them. These shenanigans are obviously still going on, probably worse now with all the toxic debt everywhere (which needs hiding). This is why only people with inside knowledge can make money on the stock market because what is fed to the market is misdirection or outright lies. Especially galling is where “things” are moved “off balance sheet”. An “honest auditor” is a contradiction in terms when it comes to the big auditors.

  4. peter
    Mar 11, 2018 at 3:57 pm

    Not that anyone cares or matters, and not that any politicians will listen but I am so sick of hearing banks doing dodgy and downright illegal things, making a fortune and then getting us, yet again, the long suffering tax payers to bail them out. When will it stop? Why do they keep getting away with it? What has to happen for people to wake up and tell the governments to stop all this and put some sort of accountability back into business? But that won’t happen all the time the accounting firms do the books, and politicians have vested interests in keeping the totally stuffed system up as it keeps their offshore accounts going.
    And they wonder why people don’t vote or trust them! If this is the bastion of the west and democracy where free trade makes anyone a rich man if they work hard, think again. You have to be part of the system to benefit; I see no difference to the Fascists or Communist systems. All like minded people keep their mates in power and wealthy. The rest of us pay for it. It’s a joke and as far as I can see, there is no end in sight.

    • MC01
      Mar 12, 2018 at 4:09 am

      Politicians and bank executives may not care but as Italian elections have shown they will have to care.
      The ruling PD party has taken a beating unseen in Italian elections since the once powerful Socialists were wiped from the map in the early 90’s and for two simple reasons.
      First is their complete lack of empathy. Like you said they did not care, they thought they know better and that by merely waving a tattered red flag, raising a clenched fist and shouting “Comrades!” voters would patiently line up to vote for them. Turns out those old dogs are dying out and are not being replaced.
      Second and most important is they bound themselves hands and feet to those banks most people hate the more they have to deal with. The brazen arrogance of banking executives, their families and their sycophants in the press is what ultimately pushed even harmless old retirees into going to the polls and voting M5S.

      M5S is a party composed of enragés, and as such their political program is somewhat confused and more than a little worrisome, but on one thing they remain coherent: the age of impunity for banks and politicians must end.

      During a speech held in front of South American diplomats and military officers in 1962 JFK warned them that “Those who make peaceful revolution impossible will make violent revolution inevitable”.
      Parties like M5S are peaceful weekend revolutionaries: they want, perhaps naively, to nationalize bankrupt banks, give their executives a fair trial and send corrupt and inept politicians home in shame. They are laughed at and their program is considered some sort of Quixotic quest despite being something any honest person can get behind.
      Let’s hope they are not followed by old school revolutionaries, the kind that appears when reforms are denied and derided, the kind that, to quote Che Guevara who knew a thing or two about this topic, “makes firing squads work around the clock”.

    • Javert Chip
      Mar 12, 2018 at 9:26 am


      Your question: “…Why do they keep getting away with it?” – the answer is citizens fail to hold politicians accountable, and keep re-electing the same political fools. Average length of service for a US congressman is 10 years; over 95% of congressmen running for re-election are re-elected (most turn-over comes fro retirement/death).

      Your statement: “…I see no difference to the Fascists or Communist systems”. This stunning level of naivety is part of the problem – go visit Venezuela, Cuba, Brazil, China and socialist N Korea.

  5. Rates
    Mar 11, 2018 at 6:35 pm

    The above statement will remain true forever i.e. as long as there’s at least 2 Spanish people alive. They’ll just switch roles occasionally.

    But again, this is not a crisis. Remember the Catalan vote. I said then, that it’s not going to be a crisis and it’s turned out to be true. Spanish “issues” just like Spain itself tends to be underwhelming. Tapas might be the most overrated thing coming out of Europe.

  6. Tony
    Mar 11, 2018 at 7:04 pm

    Who sold their property at the inflated prices and what was their connection to the bank that allowed it ro happen? Who ran away with the money?

    • Javert Chip
      Mar 12, 2018 at 9:30 am


      What’s you point?

      It’s known who cashed out & ran away with the money.

      The system has graciously allowed the statute of limitations to expire.

  7. Nick Kelly
    Mar 11, 2018 at 7:42 pm

    The Deposit Guarantee Fund has 1.6 billion???
    Now that is either a misprint or scary.

    I think the ECB (i.e. Germany) is going to be on the hook here.

    • Rates
      Mar 11, 2018 at 8:18 pm

      I am guessing Spanish deposits in Northern countries will be on the hook first.

  8. John Henderson
    Mar 12, 2018 at 7:22 am

    Once again Wolfstreet, another great article.

  9. Quadra
    Mar 12, 2018 at 3:55 pm

    Wouldn’t it be better if we had a state own bank in each country that catered for the basic need of people. Accounts,Savings, Payments, Cards and Mortgage for your home. At a reasonable price.

    Obviously most of this service could be digital and I’m certain it could even make money with lower cost for its citizens.
    On top of that it could guarantee more than 100,000 Euro so the fortunate ones are not forced to have multiple banks or investments they sometimes don’t understand.
    It would be an institution that have the customers interest and not shareholders or management pay in mind.

    Then simply all other business can be done with real risk capital, in institutions that are allowed to fail.

  10. Mar 14, 2018 at 2:31 pm

    … but which taxpayers? See e.g. Ed Kane’s ideas about US backstops for European banks at

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