"One of the mysteries
surrounding the insolvent, and already once bailed out Spanish banking sector,
has been the question why reported bad loans - sharply rising as they may be -
are still as relatively low as they are currently, considering the nation's
near highest in the Eurozone unemployment rate, and in comparison to such even
more insolvent European nations as Greece, Cyprus and Slovenia.
Courtesy of the just completed bank
earnings season, and a WSJ report, we now know why: it turns out that for the
past several years, instead of accurately designating non-performing loans,
banks would constantly "refinance" bad loans making them appear
viable even though banks have known full well there would be zero recoveries on
those loans. In fact, as the story below describes, banks would even go so far
as making additional loans whose
proceeds would be just to pay interest on the existing NPLs - a morbid debt pyramid scheme, which when it
collapses, no amount of EFSF, ESM or any other acronym-based bailout, will be
able to make the country's irreparably damaged banks appear even remotely
viable."
