Spanish banks’ bad loans jumped to an 18-year high in May, stoking concern that the costs of covering defaults will further weaken their financial strength.
Bad debts as a percentage of total lending climbed to 8.95 percent from 8.72 percent the previous month as 3.1 billion euros ($3.8 billion) of borrowing soured, according to data published by the Bank of Spain today. Lending and deposits in Spain’s banking system declined, the regulator said.
Spain is negotiating a bailout of as much as 100 billion euros for its banks after souring real estate and consumer lending forced Bankia group in May to seek 19 billion euros of aid. Bad debts are set to mount as Prime Minister Mariano Rajoy’s drive to cut state spending and raise taxes pitches the country into what the International Monetary Fund predicts will be two years of economic contraction.
“The economy is into negative territory and unemployment is still going up so in that kind of environment you can only expect non-performing loan formation to continue to tick up,” Inigo Lecubarri, who helps manage about $300 million at Abaco Financials Fund in London, said in an interview with Bloomberg Television today.
Spanish residents’ deposits dropped by 5.75 percent in May from a year earlier and slipped 0.55 percent from April, the Bank of Spain said. Lending shrank 3.82 percent in May from the same month in 2011 and 0.59 percent from April. Spain announced plans to take over Bankia on May 9.
Concern among investors that more bad loans will come to light as the economy weakens has helped push up financing costs for Spain, where the unemployment rate is already nearing 25 percent. The yield on Spain’s 10-year bond was 6.91 percent at 4:57 p.m. in Madrid, up from 6.77 percent yesterday.
The bad loans ratio is closing in on its highest level on record of 9.15 percent reached in February 1994 in the wake of the collapse of Banco Espanol de Credito SA, a lender later acquired by Banco Santander SA. (SAN) In separate data reported today, the Ministry of Public Works said home prices in Spain fell 8.3 percent in the second quarter from the same period a year earlier.
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