Moody’s Warns Spanish Banks Are Vulnerable

An effort by Spain to restore confidence in its financial system with measures including additional loss provisioning at banks will boost the country’s debt burden and undermine its credit standing, Moody’s Investors Service said Monday.

“The government acknowledges that additional public fund injections will be required to provide a credible solution to the banking sector’s woes. This will likely further increase Spain’s already elevated public debt burden, a credit negative for the sovereign,” Moody’s said in a weekly credit report.

Moody’s said that until now the government expected the banking industry to shoulder the cost of the clean-up as the industry-funded Deposit Insurance Fund provided asset protection schemes to the buyers of nonviable banks. But it said this is now changing with the public vehicle Fondo de Reestructuracion Ordenada Bancaria providing additional capital for those banks that will be unable to achieve the new provisioning requirements on their own.

The ratings company, citing the Spanish government, said the required additional provisions amount to EUR30 billion, or less than 0.3% of gross domestic product, a manageable amount from the country’s perspective. Moody’s said it has assumed for some time that further public capital would be required. In its base case, it estimates total recapitalization needs of EUR50 billion on top of the EUR15 billion committed by FROB so far, Moody’s said.

“However, there is a risk that further provisioning and recapitalization will be required, thereby increasing the government’s already high debt burden further. Including our base-case estimate, the general government debt ratio would surpass 90% of GDP in 2014, nearly triple the low of 36% of GDP in 2007,” Moody’s said, according to Market Watch.