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Spanish home prices have so far declined 25 per cent since the peak, but they still remain 50 per cent over their historical average. And now Societe Generale analyst Michala Marcussen thinks Spanish house prices are expected to decline 15 per cent in 2012 – 2013.This is worrisome for banks, since back in February the Spanish government ruled that banks would have to set aside additional €50 billion in provisions, in an effort to clean up their real estate exposure.
Even though future price declines were already built into these measures, banks are likely to be under further duress since they are unlikely to receive much help from the government. But Citi’s Willem Buiter said if the banks are considered to be too big to fail the government could step in and the losses could migrate to the public sector.
With Spain missing its deficit target, and the government announcing harsh austerity measures in an attempt to make its 3 per cent deficit target for 2013, this is likely to be a major headwind for Spain’s banking sector.
SocGen’s bank credit analyst team thinks Spanish banks are likely to meet the European Banking Authority’s 9 per cent core tier 1 ratio by its June deadline. But Marcussen writes:
“The prospect of an economy in recession in both 2012 and 2013 remains a major headwind for the banking sector; both in terms of accessing market funding at reasonable cost, and in terms of earnings.
Our Bank Credit team expect continued gradual deleveraging to remain the order of the day in Spain. Against the backdrop of deepening recession, the challenge for the government is to secure market confidence that austerity measures can deliver on the target outcomes and that bank sector restructuring remains on track.”