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SPANISH BANKING CRISES 2012 -


To: The Right Hon’ble Banco de España Governor Miguel Fernández Ordóñez

From: Athinarayanan Sanjeevraja 

Date: May 30, 2012

RE: Spain Banking Crises 

Suggestion: Good Morning Mr. Governor. Spanish banking system continue to suffer from the sovereign debt crises. The job is an onerous but it is not impossible. Spain government must act in recital with regulators and central banks to minimize the risk of further shocks of financial systems so that funding markets stablise, equity and credit markets return to health. In Spain, business demand for credit has fallen amid slow growth. The supply of credit has not been severely constrained. The first step should be separate the banks to derisk and deleverage towards creating sound business models for the future. The second step should be banks should not reduce lending in the face of funding constraints. It would be significantly damage Spain’s ability to escape severe recession.

Every country was enacting different model in order to provide effective relief for its private and state owned banks but most of the models are ineffectual. For instance, UK applied State Guarantee Scheme. UK banks are still holding a significant share of risk because the bank business model is not sound. This model only limited support for funding and liquidity. Ireland applied for Bank Asset Purchase programme. Its size is very large compare to Ireland economic resources which is small. It is ver4y costly model. Germany applied both SPV and holding structure model. It is my judgment that holding structure model was for more favourable for state owned banks than SPV model which seems to meet the needs of the  disposing of private banks toxic assets despite have solid business model. The holding structure model offers investors clearness about the remaining part of the core bank and support the banking restructure. This will allow the separation of assets from toxic. The legal and regulatory framework should be put in place to separate clear assets from toxic assets. Holding structure model doesn’t need any judiciary capital requirements, mark to market valuation and consolidation with the core bank.
I recently checked Spanish property websites, there are millions empty houses in Spain. Most of them either Bank owned or owned by developers who can’t pay back the money the banks lent them. That is massive impairment to Spanish banking balance sheets. Recently Spain Prime Minister announced that injecting the government debt bond into Bankia’s account. The Bank could then turn to the ECB and use those bonds as collateral to receive cash for the recapitalisation. This technique will prove to international investors that the Spain is having difficulties raising money on the international debt markets and make them even more reluctant to buy Spanish debt. 

I would like to recommend Spanish government would apply holding structure model in which Spanish banks can park their total toxic or also non-strategic assets outside the IFRS and banking regulation. No losses are covered by the government and the owners of the banks are directly liable future losses and not the core bank.    

I firmly believe in EU federalism. EU project don’t default. EU intends to keep it that way. Eurobonds certainly help. It can be introduced for the refinancing of any debt a country in the eurozone has over the 60 percent of GDP limit.   
  
Thank you very much for letting me states my opinion Mr. Governor.     

I am Athinarayanan Sanjeevraja with great respect of you Mr. Governor. 

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