Is BBVA Hiding Its American Losses?

Whether the Spanish banks are concealing their losses is a major debate going on in the blogosphere and has been complete at length in the Financial Times. The stakes are very high – this is a controversy about the balance of the Eurozone and perhaps of Europe itself. I’ve a lot of American visitors whose curiosity about financing stops at the American border.

I need to summarize what is going on. Spain got a monstrous building boom – a building growth on (at least) Californian specifications based very much on coastal development. The building increase significantly has slowed. The building boom attracted relatively unskilled labour – as building booms are likely to do – and about 40 percent of all migrants to EU settled in Spain. Wikipedia (I wish I could read the original Spanish source) state that the foreign people in Spain went from about half a percent of the populace in 1981 to over 11 percent lately.

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This change in racial combine has resulted in only minor tensions (with the possible exception of the top terrorist assault in Madrid). The financial meltdown has hit Spain hard. Unemployment is about 20 percent – though this overstates the GDP contraction. Most of the new immigrants are now unemployed. Twenty percent unemployment would normally result in large bank losses – indeed you would expect bank insolvencies.

However it has not happened. The two giant Spanish banks (Santander and BBVA) show up amongst the most profitable in the world and have substantial market capitalisation. Strangely Spain looks solvent despite its obvious economic catastrophe. Part of the explanation might be that the economic problems in Spain fall mainly on the newer immigrants and the unskilled end of the labour market – and that these people aren’t the loan customers of the lender.

In this formulation the Spanish downturn is approximately the same depth as the American recession – and the 20 percent unemployment rate is merely an artefact of the migrant overall economy. Either way both big banks are depleting loan reserves (at least in comparison to delinquency and non-performing loans). But both banking institutions are reporting low losses and low loan arrears. The banks however could be lying. The stakes are enormous.

Do not for a minute believe that the stakes here are overstated. Full blown financial collapses (eg Latvia, Iceland, Argentina) usually lead to riots and governments falling. Where cultural tensions run high those riots often have a racial component (rioting crowds find scapegoats). Europe can paper over the Bronze Solider riots in Estonia (which pre-date the turmoil).

They can paper over riots in Iceland and Latvia because the economies are small. But an financial disaster in Spain would cause major difficulties – difficulties I think EU would endure – but which would stress the system to its core. To become this bad although banks would need to be concealing their losses on a grand scale. Most banking institutions in crises hide a few deficits (and spread them as time passes).