Threat of Contagion to Eurozone from Spanish Banks’ Huge Bet on Emerging Markets: UBS

Spanish banks expanded aggressively into Emerging Markets to flee the consequences of the euro debt crisis.

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

UBS has alerted that Spanish banks’ outsized exposure to Latin American markets could serve as a source of contagion for future crises: 80% of the Eurozone’s total banking exposure to the region is channeled through Spain whose banks have around €384 billion of counterparty claims in the region.

A ‘shock’ in emerging and developing markets could also drag down the Eurozone economy, UBS said. Spanish banks’ exposure to Latin America is equivalent to around 30% of Spain’s GDP and leaves both the country and the Eurozone susceptible to contagion effects from a crisis emerging in any of the major contingent economies, the authors of the report, Themis Themistocleous and Ricardo García, warn.

This is the second time this year that UBS has warned about the health of Spanish banks. In January the Basel-based lender made waves by slashing the price targets of all Spanish lenders citing two main concerns:

  • Spain’s slowing economic growth which, combined with the rising likelihood of never-ending zero interest rates in the Eurozone, could negatively impact the banks’ margins.
  • Spanish banks’ low capital ratios. Most Spanish banks, including giant Santander, have capital ratios below the minimum 12% level set by the ECB. What’s more, costly litigation continues to pose a big risk to Spain’s banking sector, including the pending sentence of the European Court of Justice on the legality of Spain’s IRPH mortgage reference index which, according to Goldman Sachs analysts, could alone cost Spanish lenders between €7 billion and €44 billion depending on the outcome. With such low capital ratios, it’s not clear how the sector will be able to absorb any significant negative impact, warns UBS.

Now, UBS has thrown into the mix the contagion risk posed by Spanish banks’ huge exposure to Latin America’s fragile economies. It’s not the only one who’s raised concerns about this risk.

At the end of 2017 the IMF warned in an assessment of Spain’s financial sector that the significant international presence of the country’s biggest banks, while providing welcome diversification effects, may also have significant implications for inward and outward spillovers:

The share of financial assets abroad has grown continuously for the Spanish banking sector, with the largest international exposures by financial assets concentrated in the United Kingdom, the United States, Brazil, Mexico, Turkey and Chile.

Most worrisome of all is Spain’s banking exposure to Latin America’s two mega-economies, Brazil and Mexico. In Brazil, Spanish banks had total exposure to the economy of $150 billion in the third quarter of 2018, down slightly from $161 billion in the first quarter, according to BIS data. It’s still the equivalent of 47% of total foreign banking investments in the country.

For Banco Santander, Brazil is by far its biggest market, accounting for 26% of its global operating profits, compared to just 17% for Spain. The Spanish too-big-to-fail lender also plans to expand its presence in Mexico by acquiring the remaining listed shares of its Mexican subsidiary, worth just over €2.5 billion. According to El País, the bank wants to take advantage of the high interest rates in Mexico, currently at 8% (compared to 0% in the Eurozone), as well as the galloping credit growth available in the market. In 2018 alone Santander Mexico increased its lending by 16%.

In Mexico Spanish banks already have over $160 billion invested in the economy, which represents 42% of total foreign banking exposure. This time it’s BBVA that is doing the heavy lifting, through its subsidiary BBVA Bancomer, the largest bank in Mexico. It provided 45% of BBVA’s group profits in 2018.

Across Latin America, from Argentina and Chile to Peru and Colombia, Spanish banks are far and away the most invested. In fact, it’s no overstatement to say that as goes Latin America so goeth Spain’s banking system. For the moment most of Latin America’s biggest economies, with the obvious exception of Argentina and Venezuela, are doing quite well. Crucially, both the Brazilian real and the Mexican peso are bearing up fairly well this year despite the rallying dollar.

But economic headwinds are brewing in both countries. In February, Brazilian economic activity contracted by the most in nine months prompting analysts to revisit earlier projections of 3% growth for this year. A similar thing is happening in Mexico where a sharp increase in violence and uncertainty over the future of the state-owned oil giant Pemex are taking a big toll on economic sentiment and activity. Both the IMF and the Bank of Mexico have slashed growth forecasts for this year from 2.1% to 1.6%.

But the most immediate emerging market risk for Spanish banks is half a world away, in Turkey, where a repeat of last year’s crisis could be in the making as a maelstrom of political, geostrategic, economic and financial pressures buffet the country. The unemployment rate reached a near-decade high this week while the lira slumped to a six-month low against the dollar.

Between the first and third quarters of 2018, as the last Turkish crisis roared, Spanish banks slashed their exposure to the Turkish economy by around a quarter, from €82 billion to €62 billion. But they’re still much more exposed than any other foreign banks and the risks in Turkey are not going away any time soon.

If things do kick off again on the Anatolian peninsula, the biggest risk for foreign banks operating there, such as Spain’s BBVA, Italy’s Unicredit, Holland’s ING and the UK’s HSBC, is that Turkish borrowers begin to default en masse on foreign currency loans, which account for a staggering 40% of the Turkish banking sector’s assets. And no bank is as exposed to such a risk as BBVA, which has already lost over 60% of its €6.9 billion investment in Turkey as a result of the plunging Lira and the plummeting shares of its Turkish subsidiary, Turkiye Garanti Bankasi AS. By Don Quijones.

“Once. Only this year. Later on, that’s their problem,” says the Finance Minister of Mexico. Read… Pemex, World’s Most Indebted Oil Company, Gets Government Bailout as Suppliers Gripe About Unpaid Bills

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  19 comments for “Threat of Contagion to Eurozone from Spanish Banks’ Huge Bet on Emerging Markets: UBS

  1. The EU is deep into Spain, Spain is deep into the EM, primarily Latin America, where US and Russian troops have a dustup in Venezuela sending refugees everywhere.

    • John Taylor says:

      The refugee crisis in Venezuela happened long before the US and Russia got involved. It was the last oil price crash that led to the whole thing.

  2. andy says:

    Zoom surges 70% on IPO to the value of $16 Billion. Not clear what Zoom is.
    Weed stocks valued at many $Billions trade at price/sales of 100+, and buy each other for Billions.
    IBM buys free version of Linux OS for $40 Billion.

    The only thing missing is euphoria as some here point out…

    • Covey says:

      Zoom is a curious company in that it claims to be profitable. In the current run of IPO’s it is usual for “tech” companies to be burning cash at prodigious rates in the hope of making profits at some unspecified date in the future.

      I am not sure that a “cloud based video conferencing provider” is really worth $16bn but the market seems to be happy to have the occasional tilt at someone who does actually make money. Time will tell!

    • intosh says:

      Know WebEx? That’s what Zoom essentially is but arguably better (easier to use, more feature rich and powerful). Zoom’s founder was the VP of Engineering of WebEx and the “heart and soul” of the WebEx product. Then, he left a few years after Cisco bought WebEx. He brought with him about 40 engineers, who were also fed up with the typically big corp BS culture at Cisco, and founded Zoom. They claim that combined, they have 1000 years of experience in videoconferencing and collaboration technologies.

      The story of Eric Yuan, the founder and CEO of Zoom, is a great one. He actually said in an interview on Bloomberg that the stock price is too high! He believes that video will be the new voice. If he is right, then the market will be huge.

  3. Not true it can’t happen too big to bail says:

    Not true it can’t happen too big to bail

  4. Lemko says:

    Portugal and Spain banks are praying Erdogan seeks IMF Bailout… They went knee deep in loans to them chasing higher yields thinking no matter what bail out was protecting investments. He is cheering Maduro so that tells you something

    Word is Erdogan will mass default on foreign Debt and pivot to Russia-China, with the level of Foreign Reserves they have, it’s weeks away from total collapse unless they get bailed. Population of Turkey is leading Outflows of US Dollars, they are furiously buying US Dollars.

    EM’s about to take a serious wave of defaults, IMF will have a busy 2019… Turkey First, India Second, China third. I placed remaining account in HYG Puts Strike 83 Oct Exp today, shit is hitting the fan with US Shale unravelling as well, interesting May-June coming ahead

  5. Bankers says:

    From what I am reading, the new Brazilian government is having trouble pulling its policy through, with a quite fragmented parliament and rapidly declining popularity of the president. Flicking through various charts the ramp up in property prices is very bubble like, even if it has flattened off, and a large increase in (variable rate I think) household debt goes with it. Though it is not nearly as high as Spain’s to gd,, I expect that there are other limits that restrain it. Housing and gdp/capita the jump has been very large for both countries since 2000 ( gdp per capita in Spain doubled from 2000 to its peak a few years later, which was seven times ’85 levels…Brazil quadrupled from around 2000 to its more recent peak) . When I look at this data it puts my hairs on end a bit – there have been no astounding changes in these countries to speak of, they have become slightly more modernised and have added to housing inventory, and… ? I expect Brasil has a larger share of agriculture, but I don’t think this is where the new levels are coming from. Brazil has quite a lot of margin left with its rates, but I expect its international position and wider inflation are a barrier to it trying to inflate money supply… I hope some people in all these countries know better what they are doing than I am able to make out because it looks like the proverbial **** show to me.

  6. HR01 says:


    Many thanks for the piece.

    Between Spanish banks (with excessive EM exposure) and Italian banks (with horrible loan portfolios), appears Draghi is getting out of Dodge just in time before the system blows up.

    Though the troubles aren’t limited to just those two countries. French banks have too much exposure to Italian and Greek debt.

    Spain just chasing yields and operating margins where these can be found but they’re anything but diversified. Works well until it doesn’t.

    When these banks start to fall, who takes the hit via the swaps? Won’t be surprised if it hits DB the hardest.

    • Lemko says:

      Europe Banks won’t fail… They have been socialized, ECB will keep injecting non stop in Interbank Markets, they went QE non stop for 4 years, they won’t let banks fail. Sad part, they are stuck rebuying cause they are the only game in town in Europe, nobody else buying at those rates. Draghi fucked Europe banks so bad… DB will get bailed out by Germany, everyone is ” too big to fail ” in EU. They will get hit hard and have problems, but in the end, it’s business as usual. Super Mario and whatever it takes is a promise that never expires!

  7. ZeroBrain says:

    This is all quite hilarious in a sick way, i.e. if one forgets that the lives and futures of millions of people are affected… Banks in a broken Spanish economy lend vast sums of money to create credit-fueled growth in an even more broken economy. How absurd and dystopian. Meanwhile, throngs of plebes around the world pat themselves on the back and proudly exclaim “We live in a democracy!”

    • MD says:

      Apparently there is no alternative to this model.

      This is it. The pinnacle.

      Nothing will be altered or fixed – we’ll just keep on printing cash like the Japanese have done for 30 years and counting.

      In the process, global economic power will be handed over to China, if that doesn’t implode first…

      • MD says:

        Printing cash – and reducing taxes for the wealthy, the main beneficiaries of said cash, I should have said of course.

        • HMG says:

          A Steady State Economic Model until something dramatic upsets the apple cart.

          9/11 x 50 ?

  8. MC01 says:

    Perhaps I am alone in appreciating the subtle irony of the impossible situation foreign banks are when it comes to Turkey.
    On one side that’s one of the few places where they can still get something akin to a yield to give their investors. But on the other the Turkish economy is like a ship that has started to take water in and whose crew has failed even the most basic safety course.

    The first “naked swimmers” in the all-important real estate and construction sector are already being exposed as there are problems finding buyers: like it always happens real estate prices in Turkey have far outpaced wages, and this is in spite of a record growth in wages over the past five years… in Turkish lira terms. Many Turkish citizens were exposed for the first time in their lives to a loan-based economy and took to it with enthusiasm. But now unemployment is ticking forward and inflation has got so bad the Turkish government did what governments always do in these cases: they officially started fudging numbers. This has the double benefit of a propaganda tool and goosing GDP figures. ;-)
    As a result we have an economy which has come to rely on very high (and with hindsight unsustainable) growth figures slowing down, and slowing down even more in foreign currency terms, which is what really matters to that veritable host of foreign banks that invested in Turkey and especially in the real estate and construction sector: Unicredit, BBVA, ING, Dubai Islamic Bank, QNB, Sumitomo Mitsui…
    All the office buildings and luxury housing developments that are being abandoned or vacated throughout Turkey as the tide recedes will be an albatross around the foreign banks’ necks.

    On top of that there are a lot of customers from the Gulf who have been ensnared in purely speculative real estate schemes: the rationale of these schemes is not to buy one (or more) luxury houses or apartments to go live there, but to sell them down the road at a high profit to the host of new millionaires (in US dollar terms) Turkey was bound to produce by 2020. These people are going to lose every single dirhem or rial they put into these get-even-richer-quicker schemes.

    • Bankers says:

      Often they just knock down a few cities in another country and throw in a free passport to get sales moving, but the idea that western buyers are going to bale out these countries beyond increasing remittances is a bit far fetched. The eventual aim though is to merge the near east and north Africa fully into the western financial framework, there is a lot of opportunity if this happens. It’s a long road of turning over the local countries till they get it right , a give and take of populations and so on, but Europe is tired of this already, and of getting educated at being educator without any good result. At this scale if any national or regional power decides it has had enough of whatever then it could get quite dramatic, for now property prices are just in decline in places like Turkey or UAE (-10% yoy CavendishMaxwell)… but if you think about it maybe this bubble causing foreign banking involvement is nothing more than a trap for Turkey aimed at leaving it with a choice of either reforming to Creditors and Associates ® wishes or finding itself an isolated pariah. Large finance will do this sort of thing , believe it or not, that Erdogan blames it after accepting it is something else though.

      As for BBVA and western finance there is never a crisis that goes unwasted, but I just wonder if at some point the accounts will get so distasteful that not even Super Mario, or his successor, will hold a solution. The way it is now I get the impression in Europe that many countries are forgetting how to run themselves, and probably couldn’t any more even if they tried, which as a whole doesn’t exactly bode well.

  9. Vadim says:

    No worries, if something goes wrong, there will be more stimulus to fix it. It’s likely the emerging economies will be well as long as the Chinese economy is adequately stimulated. So the Spanish banks have nothing to fear.

    Besides, there is EU stimulus too. In fact, everywhere you look you find some sort of economic stimulus. It works!

    • Bankers says:

      I opened a packet of cornflakes for breakfast, and tried pouring them out, and a small piece of folded paper landed in the bowl instead. I unfolded it, and there was just one word written on it, it said “stimulus”. I haven’t figured it out yet, but I am guessing someone wants me to go to the store more often, or work harder, or something ?

  10. Njonjo Ndehi says:

    Developed countries have 2 options: to invest aggressively in developing countries or to get invaded en masse by immigrants from those countries. There’s no 3rd option. Japan has chosen the 1st option.

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