The Most Important Details Of The Spanish Bank Stress Tests

luis de guindos

Photo: (Photo by Pablo Blazquez Dominguez/Getty Images)

Today, at 12 PM ET, Spain releases the results of the stress tests conducted by consulting firm Oliver Wyman on the Spanish banking system.UPDATE: Click here for the results >

The Spanish banking system is a critical battleground on the euro crisis front as it has already requested a €100 billion bailout from the EU and could set a precedent for future bank bailouts in the euro area.

Markets will be eyeing the tests closely. The number to look for today: €60 billion.

That’s right around the number that Oliver Wyman presented in a preliminary report in June, and analysts say its important that today’s results don’t deviate much from those estimates.

SocGen economist Michala Marcussen explains why in a client note, writing, “Consensus for bank recapitalisation needs hover around the €60bn mark – a number also flagged by Finance and Economics Minister de Guindos. Too low a number will raise concerns that there are more hidden losses to come – all the more given the very frail economic backdrop.”

After all, Spain seems demonstrably willing to stake its 2013 fiscal plan on what are arguably overly-optimistic assumptions.

Citi credit strategist Hans Lorenzen is part of that Wall Street consensus that expects a €60 billion capital shortfall to be announced today. Given that expectation, Lorenzen thinks “much of the market reaction will hinge on the level of detail disclosed – that is, the extent to which the market will be able to test the shortfalls independently.”

Spanish banks have one major problem right now.

Non-performing loans – i.e., delinquent mortgages that have lost value as Spain’s housing bubble has unwound, have destroyed bank capital across the system. Spanish banks have a ton of them on the balance sheet.

In fact, NPLs in the Spanish banking system are at all time highs, as this chart from Goldman Sachs illustrates:

Spanish banking system NPLs nonperforming loans

Photo: Goldman Sachs

And even though NPLs are already at all-time highs, the bad loans are now piling up faster than ever:

Spanish banking system NPL nonperforming loan formation

Photo: Goldman Sachs

And the chart showing how spread across the economy the souring loans are is arguably the scariest one of all (click to enlarge):

Spain NPL ratios on the rise in industry and services

Photo: Goldman Sachs

Citi economist Guillaume Menuet says the stress test results today “will mark an intermediate but important step in the Spanish banking crisis as it should clarify the extent of the problems in Spanish banks.”

But Menuet again highlights one of the biggest problems in Europe right now, writing in a note to clients, “As we have written on many occasions before, one of the more important pieces of information will be what assumptions were used for the NPL trajectory in coming years.”

And these European governments are notoriously optimistic.

France announces massive soak-the-rich budget scheme, and it has the same big flaw as Spain’s >

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