Spanish banks need $46 billion, IMF says in audit

The International Monetary Fund said late Friday that Spain’s banks would need to raise at least 37 billion euros, or about $46 billion, in additional capital to guard against further economic deterioration in the country. That number will guide European policy makers as they seek to stabilize the Spanish financial system and prevent contagion to the rest of the euro zone.

The I.M.F. released its banking audit as Spain contemplates making a formal bailout request to Europe to help recapitalize its fragile banking system.

Spanish banks are struggling with significant losses on their housing portfolios, and they have been hurt by the country’s broader economic malaise. Last month, the Spanish government seized Bankia, the country’s biggest mortgage lender. And Spain’s borrowing costs have soared to close to record highs.

Spanish officials have said they would not request a bailout until they had reviewed audits by the I.M.F. and two independent consulting firms.

In a statement accompanying the audit, the fund said that the “core” of Spain’s financial sector is “well managed and appears resilient to further shocks.” But the report said that significant vulnerabilities remain, particularly among smaller banks and those with bigger exposure to the Spanish housing sector.

In the adverse scenario used in the stress tests, the Spanish economy would shrink 4.1 percent in 2012 and 1.6 percent in 2013. In that case, Spanish banks in aggregate would need to raise about 37 billion euros in cash to maintain their capital ratios at international standards.

But Spanish banks would likely need to raise far more than that to satisfy skittish international investors. The I.M.F. estimate did not include costs associated with restructuring, or losses on loans. Including such costs, the Spanish banking system would require as much as 100 billion euros, or about $125 billion, according to estimates by private firms.

“Going forward, it will be critical to communicate clearly the strategy for providing a credible backstop for capital shortfalls — a backstop that experience shows it is better to overestimate than underestimate,” Ms. Pazarbasioglu said.

The fund called on Spain to form a plan to recapitalize its banking sector and restructure its ailing banks immediately. It also recommended that Madrid introduce new instruments to resolve faltering financial institutions, and to bolster regulatory oversight.

“In recent years a gradual approach to taking corrective action allowed weak banks to continue to operate to the detriment of financial stability,” the report said. “The processes and the accountability framework for effective enforcement and bank resolution powers therefore need to be improved.”

The I.M.F. report comes as European countries — and leaders around the world — are pushing Spain to resolve its financial crisis. On Friday, President Obama urged European leaders to stabilize their financial sector and end their long-simmering sovereign debt crisis.

“These decisions are fundamentally in the hands of Europe’s leaders, and fortunately, they understand the seriousness of the situation and the urgent need to act,” Mr. Obama said at a news conference. “They’ve got to stabilize their financial system. And part of that is taking clear action as soon as possible to inject capital into weak banks.”

European finance ministers were expected to hold calls to hash out a bailout plan for Spain as soon as Saturday.

Corruption seen as fueling Europe's debt crisis

The failure of some European governments to tackle corruption has helped fuel the euro-zone’s debt crisis, according to a new report released Wednesday.

Transparency International, an anticorruption watchdog, points to a strong correlation between graft and fiscal deficits, with crisis-hit countries Greece, Portugal and Spain suffering the most from corruption in Western Europe.

“The reasons for the crisis differ from country to country, but countries that are worst hit by the crisis are also those where corruption is most pervasive and where there’s a lack of integrity in the public system,” says Finn Heinrich, TI’s research director.

The report, “Money, Politics and Power: Corruption Risks in Europe,” is to be presented to the media in Brussels later Wednesday and investigates more than 300 national institutions across 25 states to assess their capacity to fight corruption. Political parties, business and the civil service performed the worst in the fight against graft and wrongdoing, the report says, and “too many governments are not accountable enough for public finances and public contracts,” the latter worth €1.8 trillion in the European Union each year.

Greece, which triggered the euro-zone’s debt crisis and is under pressure from its international lenders to reform its institutions and economy, received top billing in terms of the prevalence of bribery, feeding into broader fiscal problems such as tax-evasion.

There was a widespread practice in Greece of paying officials “to knock a zero off someone’s tax bill or to speed up health care,” Mr. Heinrich said in an interview. “But as well as front-line bribery there’s also bribery on a grand scale, such as with public procurement, and the oversight of public spending is too weak.”

Greece, Portugal and Spain also performed well below average when it came to the strength of their auditing institution, seen as key to overseeing public spending and promoting transparent financial reporting by governments. TI called into question the independence of Greece’s Court of Audit, citing the fact that it was accountable to the executive and not to the parliament — unlike most European systems — and its head was appointed by the government.

The report’s findings are in line with a recent pan-European poll in which 98% of Greeks considered corruption a major problem, while only 19% of Danes worried about the issue. “When it comes to Western Europe, there is clearly a North-South divide here,” said Mr. Heinrich.

Another risk area singled out in the study is public procurement. Despite EU rules seeking to root out waste and fraud, “high-profile scandals involving public procurement continue to occur,” the report said. Here however, it is mainly among the EU’s newcomers — Bulgaria, the Czech Republic, Slovakia and Romania — where the problem is most acute. One in three managers of small and medium sized enterprises in the Czech Republic believes it is impossible to clinch a public contract without having recourse to bribery, kickbacks or other incentives, the report said.

The Berlin watchdog also sounds the alarm over the lack of transparency in the funding of political groups and in the area of lobbying. It says that 19 of the 25 countries surveyed have yet to regulate lobbying, while many of the rules in place are too weak and not binding.

“Across Europe, many of the institutions that define a democracy and enable a country to stop corruption are weaker than often assumed. This report raises troubling issues at a time when transparent leadership is needed as Europe tries to resolve its economic crisis,” said Cobus de Swardt, TI’s managing director, in a statement.

Three quarters of Europeans view corruption as a growing problem in their country, according to recent EU surveys, showing that Europeans are no longer looking at corruption as something which can be used to their advantage or embracing its potential benefits.

Expat rates: three problems that savers have to face

The problems can be summarised as low interest rates, eurozone problems and a dwindling number of providers willing to take their money.

Let's look at interest rates first. Offshore variable savings rates are heavily influenced by Bank of England base rate. It's been stuck at 0.5% for more than three years now, and it looks as if we will be lucky if it remains at that. Head of the International Monetary Fund, Christine Lagarde, has suggested that the UK should consider cutting it from this level.

Even if that does not happen then the chances of a rate rise are becoming increasingly distant. The latest predictions are that we may have to wait until 2017 before rates rise: the furthest away prediction since rates fell to 0.5% in March 2009.

This means that fixed rates are likely to start falling – and onshore, this has already happened. Research company Moneyfacts says that the average one-year fixed rate onshore is now 2.63%. Just a month ago it was 2.85%.

Offshore rates don't usually move as quickly as onshore ones – and this means at the moment expat savers are actually at an advantage. The best onshore one-year fixed rate is currently 3.6% from Cahoot but this is on a minimum of £25,000: you can get 3.45% from Investec, again on £25,000, or the same from Close on £10,000. But offshore, you can get 3.5% on just £5,000 from Alliance & Leicester or on £20,000 from Permanent or Bank of Ireland (IOM) on £25,000.

Over two years, the best you can get onshore is 3.75% on £10,000 from Close: offshore it's 3.8% on £10,000 from Clydesdale International. For five years, Lloyds TSB International is still paying 4.5% on a minimum £10,000 – you can just about get this onshore but not from a high street name and, interestingly, Halifax (part of the same banking group as Lloyds) is paying only 4.15%.

Given that offshore fixed rates are looking particularly attractive, it's wise to expect them to fall in the near future. Indeed, Nationwide International announced on Friday that it is cutting its one- and three-year fixed rates by 0.5 of a point.

Regarding the eurozone, every day brings a new tale of woe for the single currency. Smart savers may well choose to move their money from euro-denominated accounts.

That could also mean getting a better rate of return. Nationwide International, for example, pays 1.95% on less than £25,000 on its Bonus Access account denominated in sterling, but 1.8% on the euro version and just 1.05% on US dollar-denominated accounts (on €25,000 and $25,000 respectively). A survey by Lloyds TSB International found that 46 percent of investors expect two or more countries to leave the eurozone within the next year, and 42 percent predict the "complete break up" of the eurozone within the next five years.

The falling numbers of banks is a sadly recurring theme for expat savers. The most recent to announce that it is packing up offshore is AIB International, where savers are being encouraged to move by low interest rates.

The bank has announced that it is "experiencing a high volume of outbound payment requests" adding that it apologises that there may be a delay of up to two days in processing withdrawals. Hopefully this will not inconvenience any AIB savers trying to snap up fixed rates elsewhere, which could disappear at short notice.