S&P Downgrades A Key Risk Measure For Spain's Banking Sector

Spain Bulls

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S&P revised Spain’s Banking Industry Country Risk Assessment to 4 from 3 because of weak growth prospects in the near term.From the press release:

The weakening of the economic risk score for Spain’s banking system factors in our view that:

    * The economy’s growth prospects are increasingly limited. We recently revised downward our Spanish GDP growth forecast, which constrains the possibility of the financial sector to rebound in the short term. We forecast Spain’s GDP at 0.8% and 1.0% in 2011 and 2012, respectively (see “The Specter Of A Double Dip In Europe Looms Larger,” published Oct. 4, 2011).

    * Activity levels in the real estate market (particularly new housing) will likely remain sluggish. Consequently, we anticipate that the banking system will accumulate a higher than previously expected stock of problematic assets and face increased obstacles in selling real estate assets. This will in turn restrain the ability of banks to release resources from real estate to other sectors of the economy, in our view, dampening economic recovery.

    * Despite the downward trend in the current account deficit, Spain remains vulnerable to capital flows, given the prevailing volatile capital market conditions and investors’ risk-adverse sentiment. This increases the risk of a more abrupt adjustment in credit supply than what we currently incorporate in our baseline scenario.

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