Spain banks face more pain as worst-case scenario turns real

Spain’s banks face more loan losses as the pace of an economic slump risks turning a worst-case scenario dismissed in stress tests into reality.

Bad loans as a proportion of total lending jumped to a record 10.5 percent in August from a restated 10.1 percent in July as 9.3 billion euros ($12.2 billion) of loans were newly classified as being in default, according to data published by the Bank of Spain on its website today. The ratio has climbed for 17 straight months from 0.72 percent in December 2006, before Spain’s property boom turned to bust.

Spanish bank stress tests by management consultants Oliver Wyman have factored in an economic contraction totaling 6.5 percent from 2012 to 2014 in an adverse scenario that the government and Bank of Spain said has a probability of about 1 percent. Analysts at Nomura and Citigroup Inc. disagree, saying spending cuts and economic conditions mean the worst-case outcome already looks feasible.

“You can’t attach a 1 percent probability to a scenario that already looks realistic,” Silvio Peruzzo, a European area economist at Nomura in London, said in a telephone interview yesterday. Spain’s gross domestic product will shrink by 6.2 percent from 2012 to 2014, he estimated.

Spain Downgrade

Spain’s request for 100 billion euros of European Union financial aid to shore up its banks is increasing concern about the nation’s growing liabilities. Standard & Poor’s downgraded the country’s debt rating by two levels to BBB-, one step above junk, from BBB+ on Oct. 10, saying it wasn’t clear who will bear the cost of recapitalizing banks.

It cut the ratings of 11 lenders including Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, Spain’s largest, two days ago, citing the sovereign downgrade.

Spanish banks fell today. Santander declined 1.4 percent to 6.04 euros by 4:11 p.m. in Madrid trading, while BBVA slipped 0.6 percent to 6.62 euros.

Lending in Spain’s banking system fell 1.1 percent in August from July and 5 percent from the same month a year earlier, the Bank of Spain said. Deposits dropped 1.1 percent in the month and 8.7 percent from a year ago.