Spain’s Economy Minister yesterday said banks may face up to€50 billion in bad loan provisions and he vowed to crack down on regional deficits in a new austerity drive.
Luis de Guindos’ estimate of the banks’ bad loans, provided in an interview with the Financial Times, was higher than many private forecasts.
Mr De Guindos’ comments revealed the scale of the challenges confronting the new right-leaning government: a troubled financial sector, bulging public deficit, and feeble economy with high joblessness.
“If you take international valuations as in the case of Ireland, at the most you are talking about the need for €50 billion of extra provisions (for Spanish banks),” Mr De Guindos said.
“In the great majority of cases, they can provide it themselves from their profits, and it could be done not in one year but over several years.”
The banks loaned huge amounts of money during the property bubble, which imploded in 2008 leaving them holding piles of doubtful loans and devalued real estate assets. The property crash also destroyed millions of jobs, leaving Spain with an unemployment rate of 21.5 per cent, and sent the economy into a slump from which it has yet to recover.
Banks are now being pressed by new rules forcing them to boost levels of rock-solid core capital, and by the weak economy, which makes it tougher to turn a profit.
The European Banking Authority said in December that Spain’s five biggest banks required an extra €26 billion in capitalisation.
Mr De Guindos’ warning came as Prime Minister Mariano Rajoy’s Cabinet met to decide on austerity measures to help meet a target of slashing the deficit to 4.4 per cent of gross domestic product in 2012.
Spain is set to miss its target of reducing the public deficit from 9.3 per cent of GDP in 2011 to six per cent in 2012, with a final figure possibly topping eight per cent, the government says.
That overshoot could add another €20 billion to the required austerity measures, now estimated at €16.5 billion, according to the Popular Party government, which won power in November 20 elections.
Last week, the government announced Budget cuts amounting to €8.9 billion, and tax increases, including on salaries and on capital income, to bring in another €6.275 billion.
Spain’s 17 autonomous regions, which are responsible for health and education services, were hard hit by the housing market crash and are a growing source of concern for economists and policy-makers.
Mr De Guindos vowed to crack down on their spending.
The Economy Minister also said Spain’s austerity programme will target the powerful regions, with a new law in March introducing strict control over their budgets.
“You will have a priori controls. Before approving the Budget, ministers will need the green light from the central government,” he said.
Moody’s Investors Service warned last month that the regions will miss deficit-cutting targets for 2011 and could imperil Spanish efforts to curb the national deficit in 2012.