Bloomberg News

Spanish Bad Loans Jump, Adding to Concerns

June 18, 2012

Spanish Bad Loans Jump as More Consumer, Mortgage Loans Sour

Spain on June 9 sought a European bailout of as much as 100 billion euros for its banks, two weeks after the Bankia group highlighted concerns about lenders’ balance sheets by seeking 19 billion euros in state aid. Photographer: Angel Navarrete/Bloomberg

More Spanish loans went unpaid in April, suggesting the country’s recession is forcing more companies and consumers into default as the government struggles to restore investor confidence.

Bad loans as a proportion of total lending jumped to 8.72 percent in April, the highest since 1994, from 8.37 percent in March and 6.36 percent a year ago as 4.8 billion euros ($6.1 billion) of credit soured in the month, according to data published today by the Bank of Spain in Madrid.

Spain’s 10-year government bond yields today reached a euro-era record as concern the region’s debt crisis may deepen outweighed optimism about the results of Greece’s election. Euro finance chiefs called for a new government to emerge “swiftly” from yesterday’s contest, which showed the pro-bailout New Democracy party in a position to form a coalition.

“Major steps are necessary at the euro-zone level to protect Spain and Italy from fresh bouts of contagion in the future,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “Judging by past form, European politicians tend to take their foot off the gas when the pressure has gone. It is to be hoped that this time will prove different, but there is a significant risk that progress will be slower than hoped.”

The bad-loans ratio on consumer loans rose to 7.43 percent in March from 6.86 percent in December and to 3.01 percent for mortgages from 2.74 percent, the Spanish regulator said.

Record Yield

Concerns that more bad loans are still to come to light at Spanish banks has driven up the country’s borrowing costs. Spanish 10-year bond yields jumped 26 basis points to 7.14 percent at 12:25 p.m. in London. Italy’s 10-year yield climbed 14 basis points to 6.07 percent.

Prime Minister Mariano Rajoy called on Europe’s policy makers last week to do more to support Spanish bonds after the bank rescue news failed to halt yields from climbing to levels at which Greece, Portugal and Ireland needed to seek help. His government is battling to reduce the nation’s debt load as the recession deepens, leaving unemployment at more than 24 percent.

The country on June 9 sought a European bailout of as much as 100 billion euros for its banks, two weeks after the Bankia (BKIA) group highlighted concerns about lenders’ balance sheets by seeking 19 billion euros in state aid. Rising defaults on consumer, company and mortgage loans have raised doubts about the government’s strategy of focusing on making banks boost provisions for real estate lending without acknowledging higher losses on other types of credit.

Waning Confidence

The bad-loans ratio “has to go into double digits, and there’s no point in denying that fact at this stage,” Andrea Filtri, an analyst at Mediobanca Securities in London, said by telephone.

Lending fell 3.5 percent from a year earlier and 1 percent from March, the Bank of Spain said. Deposits dropped 5.4 percent from a year ago and 2.5 percent from March.

The euro region’s debt crisis has already pushed at least eight member states into recession as governments stepped up spending cuts. European economic confidence slumped to the lowest in 2 1/2 years in May and manufacturing and services output dropped for a fourth straight month.

Germany’s Bundesbank said in its monthly report published today there is greater uncertainty over the country’s economic outlook. Europe’s largest economy is showing signs of slowing after expanding 0.5 percent in the first quarter, with business confidence declining to the lowest in six months in May. Investor sentiment probably dropped in June, a Bloomberg survey showed before a release tomorrow.

G-20 Summit

Group of 20 nations will discuss a mix of measures that will include deficit reduction for some countries and pledges for additional stimulus by others with sounder finances, a Canadian official said as leaders prepared for a two-day summit in Mexico. The Group of Seven nations said in a statement that they are looking forward to working with the new Greek government.

“It will be tough for the Greek people,” Japanese Finance Minister Jun Azumi told reporters in Los Cabos, Mexico, before the G-20 summit. “But by keeping to the plan that they have been building on, I hope they make progress on mending their finances -- by implementing the agreed-upon reforms and receiving outside aid while staying within the euro framework.”

While central banks from Brazil to China have lowered borrowing costs, India’s central bank today unexpectedly left the benchmark repurchase rate at 8 percent to quell inflation. India’s benchmark wholesale inflation accelerated to 7.55 percent in May, the fastest pace in the so-called BRIC group of largest emerging markets.

Budget Cuts

Elsewhere in the Asia-Pacific region, New Zealand’s consumer confidence fell to the lowest level in five quarters as budget cutbacks and the risk of slowing global growth made households apprehensive about future income, a private survey showed. An index of sentiment fell to 99.9 in the second quarter from 102.4 in the previous three months, said Westpac Banking Corp. (WBC) and McDermott Miller Ltd.

Spain is due to announce this week the findings of a stress test of the banking system carried out by Oliver Wyman Ltd. and Roland Berger Strategy Consultants. The results of a more detailed audit of bank balances sheets by four accounting firms is due July 31, the Economy Ministry said June 8.

The European Central Bank has signaled it’s reluctant to do more heavy lifting after injecting more than 1 trillion euros of three-year loans into the banking system and purchasing government bonds. The Frankfurt-based central bank earlier this month kept its benchmark interest rate at 1 percent, matching a record low.

“The ECB will probably cut interest rates at the start of July,” said Rupert Watson, the Southampton-based head of asset allocation of Skandia Investment Group, which oversees $15 billion. “If Spanish and Italian bond yields don’t fall in the next week or two, the ECB will do another round” of longer-term refinancing operations or resume bond purchases.

To contact the reporters on this story: Charles Penty in Madrid at cpenty@bloomberg.net; Simone Meier in Zurich at smeier@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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