Charles Penty Madrid

Spanish banks, already hooked on cheap European Central Bank (ECB) loans, are haemorrhaging deposits as the government debates whether to seek a bailout.

Households and companies drained e26 billion (R280bn) from Spanish bank accounts in July, driving the ratio of loans to deposits among lenders to 187 percent from 183 percent in December and 182 percent a year earlier, according to the Bank of Spain’s data. Shrinking deposits undermine the ability of banks to support economic growth by lending to companies and consumers.

“There are significant outflows of deposits now in Spain and they won’t start coming back until people are sure they’re safe and that Spain is secure,” said Simon Maughan, a financial strategist at Olivetree Securities in London.

Spain’s financial industry is already backstopped by Europe to the tune of e100bn, and is reliant on e412bn of gross borrowings from the ECB. Investors demand 423 basis points more to own CaixaBank bonds maturing in 2015 than German bunds of similar maturity, up from a premium of about 384 when the bank’s bonds were sold in January.

Bond markets have reopened for Spanish banks after ECB president Mario Draghi pledged to help bring down government borrowing costs. Banco Santander led a return to wholesale debt markets last month when it sold e2bn of senior unsecured bonds in the first sale by a Spanish bank in more than five months.

Santander paid 390 basis points more than the benchmark swap rate, compared with a 250 basis point premium on five-year bonds that the bank sold in March.

Governments must first seek wider help from Europe’s rescue mechanism before the ECB will buy bonds. Moreover, the terms of Portugal’s May 2011 bailout require its banks to achieve a loan-to-deposit ratio of 120 percent by the end of 2014, while Ireland’s deal demands a ratio of 122.5 percent by 2013. No such provision was included in the July memorandum of understanding for Spain’s bank bailout.

“The first consequence of a lower loan-to-deposit ratio being set is that you have to identify chunks of assets to sell and that inevitably leads to haircuts and capital implications,” said Eamonn Hughes of Goodbody Securities in Dublin.

Imposing a loan-to-deposit target for Spanish lenders may mean they would have to reduce lending by between 14 percent and 24 percent, said two analysts at Nomura International yesterday.

“The need to strengthen customer funding could also see the emergence of a deposit war, putting additional pressure on revenues, which are already likely to suffer from the low interest rate environment,” they said. – Bloomberg