Eurozone crisis worsening: Spanish banks on the brink with new round of downgrades

Friday, May 18, 2012
By Paul Martin
May 18, 2012

SPAIN – Moody’s Investor Service carried out a sweeping downgrade of 16 Spanish banks on Thursday, including Banco Santander, the euro zone’s largest bank, citing a weak economy and the government’s reduced ability to support troubled lenders. Spanish bank bad loans also rose in March to their highest in 18 years, figures from the Bank of Spain showed on Friday, underscoring the problems facing the government as it attempts to clean up the sector and get its economy back on track. The Bank of Spain said bad loans rose to 8.37% of the banks’ outstanding loans, the highest since August 1994 and up from 8.3% in February, which was also revised higher. The data came as Spain was set to name independent auditors to assess how much cash its banks are likely to need to rebuild their balance sheets. Financial sources have said fund manager BlackRock and management consultancy Oliver Wyman would likely be named to conduct a deep audit of the sector, but a government source told Reuters a final decision had not been reached and BlackRock may have a conflict of interest. An announcement on the auditors would come on Friday or Monday, several government sources said. Bankia said this week it would need 4.7 billion euros in capital to comply with the last banking reform, while BFA would only need 91 million. Bankia’s share price slumped as much as 30 percent on Thursday, before the government denied a report that customers had withdrawn more than 1 billion euros from the partly nationalized lender. The Bank of Spain figures, released hours after a mass bank downgrade by credit ratings agency Moody’s, showed losses from loans made in Spain’s housing bubble are still rising. Troubled banks, along with overspending in indebted regions, are the two biggest risks for Spain’s public finances. Investors believe Spain needs to aggressively address these two issues to avoid an Irish-style bailout. Banks expect bad loans to continue to rise this year as the economy contracts and the jobless rate remains painfully high at almost one in four of the workforce, the highest in the EU. –Reuters

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