Spain’s banks are fast joining the ranks of the most unloved in Europe just as many need to raise capital urgently, deserted by investors who believe the country is on the brink of a recession that many lenders will not survive.
The government has ruled out more state aid for a sector that comprises a motley mix of international lenders and heavily indebted local savings banks.
That leaves two options: raising private capital or turning to the EU for bailout funds.
Prospects for a private sector solution are poor. Nothing on the horizon looks likely to persuade foreign fund managers to invest, such is the fear of the banks’ growing bad loans, their holdings of shaky sovereign debt and the worsening economy.
Already battered by a property market crash that began four years ago and continues unabated, few Spanish banks are able to borrow funds on wholesale credit markets and the majority are instead relying on the European Central Bank.
“Most are currently on liquidity life support from the ECB but asset quality continues to deteriorate as house prices keep falling and unemployment is still rising,” said Georg Grodzki, head of credit research at Legal & General Investment Management.
“Their funding remains constrained and competition for deposits intense,” he told Reuters.
Economy Minister Luis De Guindos told Reuters last week that all Spanish banks had met capital requirements set by the European Banking Authority under a €115 billion recapitalisation plan decided by European Union leaders in December.
But fund managers remain sceptical due to the slow-burning property crash. They include Mark Glazener, head of global equities at Dutch asset manager Robeco, who sold off his exposure to Spain at the end of last year.
“Given the scale of over-building over all these years, the present provisioning that the banks have made does not appear to be enough,” he said.
Central and commercial bankers admit that more capital may be needed with the banks facing further defaults by businesses and mortgage holders as the economy slips into its second recession in three years and unemployment is forecast to hit 24 per cent this year.
“If the Spanish economy finally recovers, what has been done will be enough,” Bank of Spain Governor Miguel Angel Fernandez Ordonez said on Tuesday, insisting that no talks were underway about any possible bank bailout.
However, he added: “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.”
Markets are showing the strains. The cost of buying protection against a default on bonds issued by the two biggest banks, Banco Santander and BBVA, has risen sharply in the past month as Spain takes over from Greece as the euro zone’s biggest headache.
Santander chief executive Alfredo Sáenz said the ECB had helped by injecting more than €1 trillion into the eurozone financial system in recent months, supporting banks as they try to cope with losses inflicted by the sovereign debt crisis.
Nevertheless, Spain still needed to speed up its banking sector restructuring and recapitalisation, push ahead with auctioning two remaining nationalised savings banks and cut the number of institutions operating in the country, he said.
“Above all, what we need is a more stable economic and financial market environment in the eurozone that would allow the institutions a better access to the wholesale markets,” he said.
“The cheap financing provided by the ECB’s three-year liquidity funds has been a positive step. It’s a beginning but that is clearly not enough.”
Market worries extend to Sáenz’s own bank. It cost $418,000 a year to buy $10 million of protection against a default on Santander debt using a five-year credit default swaps contract on April 10, up 51.7 per cent since March 1.
Similar protection against a BBVA default has risen faster still, by 53.8 per cent to $429,000 a year over the same period.
By contrast, the cost of default insurance for financial institutions tracked by the Markit iTraxx senior financials index, has risen by just 20.2 per cent.
Spain’s problems have the power to shake global markets. Investor confidence in the euro zone took a hit last week when a Spanish bond auction drew poor support, wrenching high-flying stocks and asset values down.
Spain is already being compared on markets with the three eurozone countries which have been forced to take international bailouts. European money market funds rated by Fitch already added Spanish bonds to a blacklist of unappealing creditors comprising Greek, Irish and Portuguese names in the final quarter of 2011, the ratings agency said last week.