Don Quijones: Shock Waves Spread from Spain’s New Banking Crisis

By Don Quijones, Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street

The shares of Spain’s sixth biggest bank, Banco Popular, plunged 36% this week to €0.43, reducing the bank’s market capitalization to €1.7 billion. Just three weeks ago, when there was still a glimmer of hope that things could be turned around, it was worth almost double that. Its shares traded at €15 ten years ago, before the collapse of Spain’s mind-boggling housing bubble that left Popular holding billions of euros of real estate assets.

Popular may not be a systemically important institution, but it’s nonetheless an institution of great import. It has the largest portfolio of small business customers in Spain and enjoys the patronage of one of Spain’s most influential institutions, Opus Dei. Its well-heeled members are among the bank’s most important shareholders and investors, and they stand to lose a lot of money if a last-minute buyer is not found soon.

This is an outcome that can no longer be discounted, especially after reports emerged on Thursday that senior officials of the ECB’s regulatory arm, the Single Supervisory Mechanism, had warned the bank could be wound down if it fails to find a buyer. But the EU agency charged with overseeing bank failures later issued a statement saying it “never issues warnings about banks.”

But the damage has already been done. And it’s not just Opus Dei, or Popular’s thousands of long-suffering retail investors, that could end up paying a heavy price. Popular’s investors also include PIMCO, one of the world’s largest asset managers, which owned €279 million of Popular’s outstanding €1.25 billion of face value in AT1 bonds at the end of March, making it by far the largest holder at the time.

These AT1 bonds go by another more familiar name: contingent convertible bonds, or Co-Co bonds. These are financial instruments that pay high coupons, because they come with a high risk, designed as they are to absorb losses at times of distress, by converting to equity or being written down when the lender’s capital ratio falls below a certain point.

Popular’s second batch of Co-Cos, worth €750 million, dropped to 59 cents on the euro, the lowest point ever reached by a bank Co-Co bond.

So far, despite their high-risk nature, no AT1 bond has ever been bailed in. But Popular, as a mid-sized bank that has arguably exhausted all its possibilities of resurrection, is in a terribly weak position.

“It would be the first triggering of an AT1,” Lloyd Harris, an analyst at Old Mutual, told the FT. “These types of events are more likely for Popular than they ever were for Deutsche Bank,” he added, referring to Deutsche Bank’s Co-Cos that got trampled last year.

If a triggering occurs, PIMCO and other investors would take a hit. If Popular were wound down, many more wealthy global investors, particularly in Latin America, would also be hit hard. They include the Luksic, Chile’s richest family, which bought 3% of Popular’s shares at the beginning of May in an operation then valued at €87 million. It’s now worth little over half of that. Another investor that stands to lose big time is the Mexican billionaire Antonio del Valle, who invested €450 million in Popular in 2013.

In recent weeks rumors have abounded that a loose consortium of Latin American investors is planning to take over the bank, once its share price has tanked low enough. But for the moment, they are just rumors.

By now, the only bank that appears to still have a passing interest in buying Popular is Spain’s biggest bank, Santander, which would like nothing more than to get its hands on Popular’s retail business, in particular that massive portfolio of small business clients. But for that to happen, Popular’s over €30 billion of impaired real estate assets would have to be neutralized, almost certainly involving taxpayer funds. Something would also have to be done to nullify the class action law suits mushrooming on the other side of the Atlantic over Popular’s alleged misleading of investors in the lead-up to its last capital expansion, in 2016 (What’s the matter with these investors that bought the capital-expansion hype? Don’t these people read WOLF STREET?)

The big question is whether the ECB and the European Commission would lend their approval to such a takeover, especially if billions of euros of public funds are required. Having just awarded Italy’s Monte dei Paschi a last-minute reprieve, prompting accusations that even banks that are not too big to fail are still getting bailed out in Europe 10 years after the financial crisis, they may feel that the time has finally come to test out the EU’s bail-in law.

And if they do, a lot of investors, rather than taxpayers, could end up losing their shirts, which would be a welcome change, while market players may even begin questioning just how safe Spain’s saved banking system really is.

Banco Popular “itself cannot at this point make a rough calculation” of what its value is, “and if they can’t, neither can we.” Read… Banco Popular’s Co-Co Bonds Plunge as Balance Sheet Chaos Revealed in Potential Forced Sale

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  1. ambrit

    It will have to happen sooner or later. The real “market” will make its’ presence felt.
    The effect will probably be one of “moral contagion.” Just as when banks toughen their lending criteria for small mortgage seekers, thus creating a self fulfilling prophecy that both predicts and drives down economic activity, the fallout from a bail in of a medium sized bank will scare off bank investors just when they are needed most. Secondarily, it is all of those “small and mid sized businesses” who will pull in their horns and magnify the effects of a bank failure. When the co-cos go, we might see bank runs in Spain. How far the ripples will spread in todays’ highly interconnected business world is anybodies guess. That’s what’s keeping bankers and economists up late worrying.

    1. jackiebass

      I don’t believe a real make exists except on paper. In fact I don’t believe markets should dictate banking. There are a lot of very intelligent people out there but we seem to be continuously dealing with a bank crises. Banks behavior, because of what they do , have to be carefully controlled through regulation. Let these intelligent people do the job of regulating banks to prevent this cycle of never ending crises.

        1. Bandit

          Concise and accurate description of todays bankers in a world of systemic corruption.

    2. JTMcPhee

      Why do bankers and economists stay up worrying about this? Seems to me their pay packages and bonuses (for the bankers) and paychecks (for the lesser breed, “economists”) won’t be hurt if the past is any guide. And “if laws were broken,” and of course ” the law” is itself completely broken vis a vis ordinary people and their lives, the bankers and economists and their cronies will face no judgment or forced reparations or retribution.

      It’s just us mopes who generate all the actual real wealth and do the work that creates the substrate that the toxic froth of FIRE foams and bubbles up out of, who once again will have to tighten belts and pull on bootstraps and struggle, like the Greeks and so many other mope categories, to feed ourselves. And build another economic soil base for these vastly toxic, parasitic growths to bud from yet again.

      Mark to market, the fictional but all-conquering market, and let the house of cards collapse? The horror, the horror! And yes, I know I and billions of other mopes will fall to earth once the froth of bubbles and “groaf” collapses. My bad, for being born into such a species, at such an inflection point in the arc of its existence. One hopes that some mechanism will develop to be sure the bubble blowers and banksters actually “take a haircut” this time, and don’t just get to skate off like the Germans who U-boated and CIA’d their way out of the ashes and rubble of the Fatherland, with priceless art and tons of gold taken from the teeth of gassed and shot camp inmates…

      The sign in the China shop always reads, “You broke it, you bought it.”

      Of course “rough justice” is only for the poor and weak. Isn’t it.

      1. ambrit

        It’s a shame to admit it but you are right about how “idealism” has been denatured in todays’ socio-political environment.
        The Spanish had a good beginning with their In the Streets mass demonstrations. We will have to wait and see if any “bail ins” that happen when these co-cos are enforced provoke another round of street action there. May one hope for una pelicula titled; “Hijo de Podemos?” Could we get Felipe and la Infanta interested and call it, “Real Podemos?”
        I still remember when “Laugh In” took the piss of Von Brauns autobiography and announced the books’ title as “We Aimed At The Stars: And Hit London.”

      2. Norb

        In my experience, most people live in a fantasy world of their own creation. The daily struggles in their lives channeled in such a way to keep them narrowly focused on their own troubles. The connection between their personal struggle and the larger community is rarely even attempted- it is just too much work and filled with emotional turmoil. The majority leads passive lives driven by the currents of advertising and political propaganda. Most social life is passive in the sense that people work within the confines defined by the existing culture. When life gets too problematic, the majority just checks out emotionally and physically because at this time, socially and culturally they can. It is the inherent power of the status quo.

        Mopes check out and the elite attempt to hide and obfuscate their various crimes against the weak. This keeps the cycle flowing. Hemming in outliers with physical violence ensures the flow is not misdirected.

        In the end, elite corruption, if left unchecked, weaken the society and open the way for it’s ultimate destruction. The society and culture fall to pieces under the weight of its own contradictions and shortcomings. The only thing remaining will be “rough justice” as the self-fulfilling prophecy of capitalism professes. Survival of the fittest in a competitive world and all that self-justification.

        What needs to happen is a break in priorities from self-accumulation to continual renewal. Growth in a natural sense, not in the abstract economic jargon of capitalism. But that is a moral question that would need the guidance and leadership of a truly knowledgeable people dedicated to the betterment for all life on this planet.

        Forcing the elite to share and articulate their vision of the future will be their downfall. Their vision is one of oppression and everyone knows it- and as the environment is stressed beyond ability to regenerate for human needs, the harmful consequences will be unavoidable.

        The new system that will be born from this wreckage must be one of cooperation and the positive aspects of group action. Resource depletion and the slow rise of social consciousness- elite lies cannot last forever- will allow for some other form of social cohesion.

        Life is the stronger force. Stupid humans cannot extinguish all life on the planet- only their own species. That is the ultimate elite irony. I can’t envision a world where an immortal Donald Trump exists.

      3. gepay

        Old Spanish proverb “The law is like a spider web. It catches the flies but the hawk goes free.”

    3. Drage

      No I think we are a long way off from the point when real markets reassert themselves and price risk accordingly. What’s fascinating about Banco Popular is how little news there is about it outside of Spain.

      Banco Popular will get bailed somehow, and not in a bail-in, which would spook the hell out of Eurozone bond investors.

      1. ambrit

        That could well be, but, how is this bail out accomplished without creating extremely “bad” optics for the banking industry? Does the Eurozone have to construct another “bad bank” repository? Who gets to pay for all of this? I don’t see the Eurobanks doing the fiat money thing, since the germans seem dead set against anything other than austerity for the periphery. I’m wondering if we’re going to see a Greece 2.0.

  2. witters

    “Having just awarded Italy’s Monte dei Paschi a last-minute reprieve, prompting accusations that even banks that are not too big to fail are still getting bailed out in Europe 10 years after the financial crisis, they may feel that the time has finally come to test out the EU’s bail-in law.

    And if they do, a lot of investors, rather than taxpayers, could end up losing their shirts, which would be a welcome change”

    No Bank Will Go Down! (For if so, pray tell, what next?)

  3. Susan the other

    I think I see something emerging out of the fog. The new bank. With financial horizons that stretch for a century in order to ride out the ups and downs of irrational, frantic financial time. So the bank – the very institution that imposes “financial time” on the world of debtors – must in the end bail itself out by writing down the impossible debt burdens of its hapless customers, and it will give itself extra time to do so. Banks will become very flexible. When Spain’s next real estate bubble pops the banks will write down every mortgage and eat it on paper because they can make it up in time. And the co-co coupons will be phased to match their balance sheet. Time and write downs are the only things they can give themselves. And it’s only fair because they create money in the first place out of thin air. Some new law will be written for chartered banks that will specify they must write down all the debt that went south due to whatever catastrophe and in return they can grant themselves the solvency of unlimited time. What a grand idea.

        1. JTMcPhee

          I keep scribbling about “Islamic banking and finance.” Because there are models out there that at least in principle, outlaw interest collecting (rents) on the lending of money, and other hallmarks of the vast corruption that is “Western Bankstering.” Albeit motionst that are tainted near to death by the Bernaysian pumping of convenient and distracting “fear of Sharia Law!!!!ZOMG!!!!”) that for both selfish and seemingly more altruistic reasons are starting to appear in “Western (ripoff) banking.”

          A primer of sorts:, and anaother: And both US banksters,, and their sorts elsewhere,, are (maybe just for marketing purposes, all that “black money” like 1MDB floating around at the disposal of “Muslims,” wanting a familiar and ‘safe’ home) nodding toward and “offering” supposedly Sharia-compliant “halal” banking services. And of course the credentialed parasites are busy, working away at corruption of the ideal, No surprises, ever, anywhere, for the sufficiently skeptical mind…

          1. Brian M

            Wasn’t usury strictly limited in pre-modern Europe as well?

            Didn’t stop vast edifices of corruption in service to monarchial ambitions (and opportunities for subpopulations not bound by the usury prohibitions).

      1. UserFriendly

        That would be the Credit Suisse model for escaping a crisis.

        I actually have a meeting with a candidate for Mayor of Minneapolis coming up and this is on the top of the agenda. A publicly owned bank (like North Dakota has) but none of that mark to market accounting and lots of lending at cost to the city for a job guarantee and to citizens.

  4. DJG

    Opus Dei? The quasi fascist movement within the Catholic Church that Antonin Scalia is rumored to have belonged to? How terrible for them. Tsk.

    1. Sue

      I agree on the Opus Dei. This is what Co-Cos are; this is what PIMCO & Co purchased. Convert them into shares. Bail-in & not more bail-outs!

  5. sierra7

    Opus Dei! Now there’s a name I haven’t head in a long, long time!!
    The Fascist arm of the Catholic Church; notoriously involved in Latin America to try to keep the “rabble” in line with the monied classes of Catholicism there (and South America). “Flourished” under Franco. Worked hard to disallow “Liberation Theology” to Catholic adherents in LA.
    (“Cry of the People” Penny Lernoux 1980)
    “Fury of Opus Dei in Latin America” May 20 2013

  6. gman

    Santander, which would like nothing more than to get its hands on Popular’s retail business, in particular that massive portfolio of small business clients. But for that to happen, Popular’s over €30 billion of impaired real estate assets would have to be neutralized, almost certainly involving taxpayer funds.

    What’s Spanish for, ‘la plus ça change’?

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