Spain’s banks face more loan losses as the pace of an economic slump risks turning a worst-case scenario dismissed in stress tests into reality.
Bad loans as a proportion of total lending jumped to a record 10.5 percent in August from a restated 10.1 percent in July as 9.3 billion euros ($12.2 billion) of loans were newly classified as being in default, according to data published by the Bank of Spain on its website today. The ratio has climbed for 17 straight months from 0.72 percent in December 2006, before Spainâ€™s property boom turned to bust.
Spanish bank stress tests by management consultants Oliver Wyman have factored in an economic contraction totaling 6.5 percent from 2012 to 2014 in an adverse scenario that the government and Bank of Spain said has a probability of about 1 percent. Analysts at Nomura and Citigroup (C) Inc. disagree, saying spending cuts and economic conditions mean the worst-case outcome already looks feasible.
â€œYou canâ€™t attach a 1 percent probability to a scenario that already looks realistic,â€ Silvio Peruzzo, a European area economist at Nomura in London, said in a telephone interview yesterday. Spainâ€™s gross domestic product will shrink by 6.2 percent from 2012 to 2014, he estimated.
Spainâ€™s request for 100 billion euros of European Union financial aid to shore up its banks is increasing concern about the nationâ€™s growing liabilities. Standard & Poorâ€™s downgraded the countryâ€™s debt rating by two levels to BBB-, one step above junk, from BBB+ on Oct. 10, saying it wasnâ€™t clear who will bear the cost of recapitalizing banks. It cut the ratings of 11 lenders including Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), Spainâ€™s largest, two days ago, citing the sovereign downgrade.
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