SPAIN: The Bad Economic News Continues To Pile Up

New data from the Bank of Spain (the central bank) indicate that doubtful loans continued to rise in August, and that households’ financial accounts deteriorated in the second quarter.

Doubtful loans amounted to EUR178.6bn in August, up from EUR173.2bn in July. The aggregated balance sheet of credit institutions also continued to shrink, amounting to EUR1.70trn against EUR1.72trn in July. This diminution came from a EUR7bn fall in mortgage loans and a EUR11.2bn fall in other fixed-term loans. As a result, the proportion of doubtful loans rose to 10.5%, up from 10.1% in July, compared with 5.1% at end-2009 and only 0.9% at end-2007. This indicates that the full impact of the bursting of the housing bubble on banks’ balance sheets is yet to be felt. The value and proportion of non-performing loans are expected to rise further in the coming year, resulting from both a continuing fall in property prices and a deterioration of the economic environment, especially the rise in unemployment.

According to the central bank’s data on households’ financial accounts, their net financial assets fell to EUR702.5bn in the second quarter of 2012, down from EUR840.8bn a year earlier and EUR760.7 in the first quarter of 2012. Outstanding liabilities fell by EUR23.4bn, reflecting a EUR33bn shrinkage in outstanding loans and a EUR10bn increase in other accounts payable. However, the value of outstanding financial assets fell by EUR161.6bn during the same period. This was mainly attributable to a EUR150.5bn fall in the value of shares and equities, particularly unquoted shares. However, given the relatively good performance of Spanish stock in the third quarter, we expect the value of outstanding financial assets to rise again in the third quarter. Interestingly, the value of households’ deposits remained broadly stable, confirming our view that the capital flight witnessed in the past 12 months came mainly from companies and financial institutions.

Despite this background, on October 18th the country was able to issue about EUR4.6bn worth of bonds at lower rates than a month earlier. In particular, Spain’s 10-year bond yield fell to 5.42%, its lowest level since April. Although bad news is piling up on the economic front, market players seem more affected by the announcement by the European Central Bank (ECB) that it would intervene in secondary markets if Spain requested help from euro zone rescue funds. This announcement was also welcomed positively by some rating agencies, which in turn improved investor confidence.

Nevertheless, announcements during the EU summit on October 19th suggest that European leaders still have a long way to go before agreeing on the details of the bank bail-outs in Spain and in other countries. Uncertainty on this crucial issue and delays in Spain’s application for a bail-out of some sort will soon bring back market instability, at which point Spain will be forced into a bail-out, instead of voluntarily applying for one.

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