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Spain says banks may need more capital

Bank of Spain Governor Miguel Angel Fernandez Ordonez talks to the media after speaking at a conference in Madrid April 10, 2012. — Reuters picBank of Spain Governor Miguel Angel Fernandez Ordonez talks to the media after speaking at a conference in Madrid April 10, 2012. — Reuters pic

MADRID, April 10 — Spain's banks may need more capital if the economy deteriorates, the head of the central bank said today, reflecting growing concerns that some might not survive a recession that may be made worse by the government's austerity drive.

Spanish lenders were bruised by the 2008 property crash and have been under scrutiny since the euro zone debt crisis deepened last year. But a surge in loan defaults in other sectors has put them back under the spotlight again.

Analysts have said Spain may be forced to take a bailout like Greece or neighbouring Portugal although the government and central bank have ruled that out.

The country's bond yields climbed higher today as investor sentiment towards the country soured following a weak debt auction last week.

Central Bank Governor Miguel Angel Fernandez Ordonez said a recent reform might solve bank's problems but nevertheless raised the idea they might need more capital.

“If the Spanish economy finally recovers, what has been done will be enough, but if the economy worsens more than expected, it will be necessary to continue increasing and improving capital as necessary in order to have solid entities,” Ordonez told a Madrid conference.

The economy is forecast to contract by 1.7 per cent this year but is likely to deteriorate further as the government slashes 27 billion euros RM108 billion) from the central budget, and billions more from spending in the country's 17 autonomous regions.

Ordonez said it was unlikely the country would experience a strong recovery in the short-term and called for better competitiveness to generate budget surpluses.

“The solutions to the crisis, which came from excessive debt or loss of competitiveness, are very slow within a monetary union and that is why we can't afford to become complacent,” he said.

Spain's banking sector, burdened with debt taken on during a decade-long housing boom that collapsed in 2007-2008, is undergoing a third wave of consolidation, which aims to cut the number of players to less than a dozen from about 40.

Reforms

The latest banking reform, introduced two months ago, urged banks to put aside 50 billion euros of provisions to mop up real estate losses and encouraged mergers and costs savings without dipping into state funds.

The government says it will not need to inject more state aid into its banks, but many analysts are sceptical that simply forcing weaker rivals into the arms of more solvent players will be enough to fill funding gaps.

Spanish borrowing costs have jumped in the last week as markets have questioned whether the austere budget will work.

The spread between benchmark Spanish and German bonds, a measure of investment risk in Spain, jumped today to 418 basis points from 392 at Monday's close.

Keen to persuade investors and other European leaders that Spain can hit its deficit reduction target this year, Prime Minister Mariano Rajoy announced 10 billion euros in new health and education services yesterday.

Investors are closely watching the autonomous regions, which overspent last year, to see whether they make the cuts the central government is pressing them to make.

“Of course, it will ultimately fall to the regions to implement their budgets,” said Barclays in a note to clients.

“We think market confidence will only be restored if the (quarterly) fiscal performance of the region governments (and the central government) shows they are implementing their budget according to plan.” — Reuters

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