Thursday, October 11, 2012

The Eurozone's commitment to supporting Spanish banks questioned by S&P, others

Kostas Kalevras had another good post on the latest data release from the Bank of Spain (here). The good news is that Spanish banks' borrowings from the ECB fell in September, following the ECB's commitment to do "whatever is necessary" to make sure Spain (and others) stay in the Eurozone - reducing the redenomination risk. Nevertheless the latest data from the nation's banking sector still shows declines in lending and losses associated with rising bad loan balances.

Source: Bank of Spain (here)

The collapsing property market is taking its toll. Much of the "corporate" debt in the chart below represents loans to property developers.

NPL = Non-performing loans (Source: BNP Paribas)

Independent analysts and rating agencies continue to be skeptical about a successful bailout of the Spanish banking system by the Eurozone governments. Estimates of the banking system's capital requirements vary considerably from the official figures, pointing to the fact that funds committed so far may be insufficient. And in spite of the commitments made back in June, not a cent of this aid has reached any of the Spanish banks, as key details of the bailout are sill being negotiated (see discussion).

In fact the S&P's downgrade of Spain's government debt was a direct result of the uncertainty around the use of ESM to support Spanish and other periphery banks.
S&P: - A policy setting framework among the eurozone governments that in our opinion still lacks predictability. Our understanding from recent statements is that the Eurogroup's commitment to break the vicious circle between banks and sovereigns [see post], as announced at a summit on June 29, does not extend to enabling the European Stability Mechanism to recapitalize large ongoing European banks. Our previous assumption (which was a key factor in our decision to affirm our ratings on Spain on Aug. 1, 2012) was that official loans to distressed Spanish financial institutions would eventually be mutualized among eurozone governments and thus Spanish net general government debt would remain below 80% of GDP beyond 2015.
S&P's downgrade was to BBB-, one notch above "junk". The impending Moody's action may not be so kind. With junk status, the use of Spanish bonds as collateral at the ECB will require special approvals while bank holders of such debt will be required to allocate more regulatory capital to these positions.
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