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

Economic Growth

Under Oliver Wyman’s worst-case projection, an economic contraction of 4.1 percent in 2012, 2.1 percent in 2013 and 0.3 percent in 2014 would contribute to 270 billion euros of credit losses and a 59.3 billion-euro capital shortfall for banks. The base case foresees shrinkage of 1.7 percent this year, 0.3 percent in 2013 and an expansion of 0.3 percent in 2014. A deeper recession poses the risk that banks will have to raise more capital to cover losses.

Oliver Wyman won’t comment on estimates laid down in the stress tests, an official at Llorente y Cuenca, a Madrid public- relations firm representing Oliver Wyman, said in a telephone interview yesterday.

Spain commissioned the review as part of terms for its European bailout. Oliver Wyman said in its report on the stress tests that a steering committee that included the European Central Bank and the International Monetary Fund had deemed its adverse scenario conditions to be “appropriately conservative” relative to Spanish macro-economic indicators over 30 years.

Spanish banks’ loan losses will continue to grow because of the deteriorating economic outlook and rising unemployment, said Ebrahim Rahbari, a London-based economist at Citigroup. He predicted a 5.8 percent contraction for Spain’s economy between 2012 and 2014.

Adverse Scenario

“The adverse scenario of the test looks closer to a forecast of economic performance over the next three years than a stress case,” Rahbari said in a phone interview. “That surely has consequences for loan-loss rates and the one we are most concerned about is household mortgages.”

Deutsche Bank AG says the economic slump in Spain will be less pronounced, predicting a 1.7 percent decline in GDP over the period. The economy will grow 0.7 percent in 2014 after a 2.6 percent slump this year and in 2013, the bank said.

In a Bloomberg survey of 37 analyst estimates for Spanish economic growth, the average forecast is for a drop of 1.6 percent in GDP this year and 1.4 percent in 2013, followed by growth of 0.2 percent in 2014.

“A contraction of 2.6 percent over two years is still a hell of a contraction,” Gilles Moec, Deutsche Bank’s co-chief European economist in London, said by telephone yesterday. A pledge by European Central Bank President Mario Draghi to help bring down Spanish borrowing costs will probably help Spain avoid being sucked into a recessionary “spiral,” he said.

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