The IMF’s 188 member countries convene in Tokyo this week as low growth damped by fiscal consolidation in the richest economies hurts developing counterparts from China to Brazil. As the IMF urged measures to boost confidence, uncertainties out of Europe show no sign of abating, with leaders still divided over a banking union and Spain resisting a bailout.

Speculation that Spain was on the brink of applying for an EU bailout from the newly launched European Stability Mechanism (ESM) was rejected by Spanish Finance Minister Luis de Guindos. Germany’s Schäuble was also confident that Spain would be able to recover without outside help. “I’m always listening closely to what the Spanish government says. And I can confirm that the government says the country doesn’t need a bailout. Spain is doing everything that’s necessary – in financial policies and structural reforms. The problem that Spain has is with its banks, and that dates back to the real estate bubble of the past years.”

Record unemployment, a shrinking economy and growing protests are making things difficult for the government in Madrid. The interest it had to pay on bonds had recently dropped to 5.69 percent, which is a rate considered only just bearable. London chief economist of bank Unicredit, Erik Nielsen, described the situation in a recent analysis as one that most likely would persist for another months. Only if the interest rate Madrid had to pay on bonds was to rise, would Spain need to apply for a bailout, Nielsen wrote.

Fitch Ratings has said repossessed properties in Spain are worth 48 percent less on average than the value assigned when their mortgages were originated.

Spanish business people, upper middle class families and their loan guarantors, typically parents of first-time buyers, now account for 60 percent of foreclosures in Madrid, according to AFES, an association that advises homeowners facing repossession. Three years ago, 80 percent of foreclosures were on the homes of immigrants, usually the first to lose jobs and fall behind on loan payments in a souring economy. They now comprise 40 percent of the total, according to AFES.

In the run-up to the current crisis, banks sold retail customers 22 billion euros of high-yielding preferred shares. Bank losses deepened, the securities plunged in value and the retail customers saw their savings diminished, and in some cases, locked in an illiquid product. Now, angry Spaniards are finding an outlet for their frustrations, according to The Wall Street Journal: threatening and slashing tires of bank employees, vandalizing branches, or stalling operations by slowing tellers with repeated requests to withdraw 50 cents at a time.

Entrepreneurs who refinanced home loans to support businesses at the beginning of the crisis in 2008 have gone bust or failed to keep up with payments and now make up 15 percent of Madrid home foreclosures. Once-affluent families, who until recently had been able to buy time by selling assets other than their homes, represent another 25 percent, according to the AFES study carried out last month.

Economist Shayne Heffernan takes a look at the Spanish Banks Stress Tests

Having reviewed the core data from the Banco de Espana I have come to a very different number than the much publicized $76b shortfall in the Spanish banking system, my number is $300b.

Before we get to the raw data lets take a look at the Economic parameters currently defining the Economy of Spain.

Spain’s already terminal debt as a ratio of gross domestic product (GDP) will reach 90.5% by end 2013, according to the document presented to parliament for approval, almost three times that registered before the property bubble burst in 2008, property prices continue to slide and that fall will be exacerbated by high unemployment, chronic over supply of real estate and diminishing international demand. The real ratio by 2012 will be 95% plus.

The budget details spending cuts of 3.1% in health, 14.4% in education and 6.3% in unemployment benefits, as the recession, which began in the first quarter, drags on.

Spain will also slash state funding to commerce, tourism and small, and medium-sized companies by 18.8% and infrastructure by 13.5%.

Unemployment in Spain is more than double the European Union average, with half of all working-age under-26s unable to find jobs and shattered businesses laying off employees they cannot afford to pay. The rate is 25% unemployment rate (the rate is above 50% for those under age 25), for those with job things are not much better with new tax hikes, and new “austerity” spending cuts.

Real Estate: The average price of houses and apartments declined 14.4 percent from a year earlier, the most since the measurement began in 2008.

Using these parameters we would expect a similar rise in bank loan defaults.

With the parameters set lets look at the individual data in the results themselves set out below.

After discounting expected earnings, reevaluating the Real Estate component, taking in to account the bad debts and shrinking economy we arrive at a short fall of $300b (calculations are available to HCM clients).

The $300b number is conservative in my opinion as it does not discount the value of Government Bonds owned by the Banks. In my opinion these do not value as high grade debt, they are at best questionable.

In valuing such instruments in general I am using a discounted rate of 18% to face value, more than fair given the Greek default.

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Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.Read the Terms of Service