Spanish Cajas Merging, but Are They Serious Yet?

Spanish savings banks, called cajas, are finally moving.  It took the central bank to take over CajaSur, which is controlled by the Catholic church in Cardoba, ten days ago to light a fire under the others.  There were about 45 of these cajas and a number of mergers have been announced in recent days.  Another 4 announced a merger earlier today.  The end goal is the reduce the number to around 20-25.  The government has set up a fund (Funds for Orderly Bank Restructuring), known by its Spanish acronym FROB.  It was funded with 99 bln euros.    The government gave the cajas until the end of the June to draw from the fund to restructure.

The mergers are needed to boost achieve the economies of scale, especially in terms of the deposit base needed to support the large (and increasingly bad) real estate loans.  However, the mergers are soft (called Sistema Institutional de Proteccion–or SIP) in the sense that they seem to combine some central functions but each party maintains a great deal of autonomy and retain their regional brands, and most importantly their own balance sheet and legal structure.

It is not clear at this juncture, whether this will really lead to the kind of restructuring needed that leads to true consolidation or whether it is just superficial/cosmetic changes.

Over the past month, Spanish 10-year bonds have been the worst performer in the euro zone with yields rising 44 bp.  Italy comes in second at +29 bp.  The ECB purchases of Greek and Portuguese bonds are distorting the performance of those bonds.  Some reports suggest that the ECB’s purchases have been concentrated in Greece.  These reports suggest some 2/3 of ECB bond purchases have been Greek.

The short end of the coupon curve is even more illustrative of the pressures that have emerged on Spain.  Over the past month, 2-year Spanish yields have risen 81 bp and 57 in Italy.  That contrasts to a ECB-distorted 277 bp decline in Greece and a 71 bp decline in Portugal.

The European financial system remains strained.  This is illustrated by the record amount of money that is being parked overnight at the ECB and the continued rise in 3-month Euribor which is at its highest level for the year.