The cost of credit protection for Spanish banks soared yesterday.
According to Risk.net, Spanish bank BBVA Group’s spread rose to 242.6 basis points (bp) compared to 221.5 the day before. Banco Santander’s credit spread went from 207.3bp to 228.7bp at the same time. It’s now at 250 according to CMA.
The CDS referencing Spanish sovereign debt also rose to 264.3bp from 229.7bp, though it has eased back to 260 now.
Rising spreads translate into rising funding costs, which Spanish bankers will need to deal with.
“Banks are examining how the current situation is going to impact their debt refinancing, and how that will impact their portfolios. Obviously, delinquent portfolios would be difficult to dispose of, so banks will probably have to dispose of rather better portfolios and de-risk there because they don’t have enough liquidity. I know people are crunching numbers on those kinds of things,” says one Madrid-based risk manager at a European bank.
Moreover, Santander explained in a press release how credit downgrades for Spain overall, not just Santander, can hurt the bank.
“Indirectly, the situation overall, not just the downgrade, affects Santander’s financing costs in wholesale markets. Today, it costs Santander about 10–30bp more to issue debt than it does a bank with the same rating from another country. We can recoup some of that by passing it on to customers, which means about 20bp more on new debt Santander issues – a very small part of the balance sheet,” said José Antonio Álvarez, chief financial officer of Santander.
Smaller banks face the greatest challenges, since they are most likely to have trouble refinancing debt. So far larger banks seem to be OK on the refinancing front according to Risk, but are still being hit with rising fund costs as described above. The more preemptive measures they can take now the more likely they can stave off further Greece-related contagion.
On the broader economic front, Spain just came out of a two year recession, based on Q1 GDP data. Hopefully the country’s return to growth will temper recent credit concerns and keep funding costs from exploding as would be the case if a Greece-style crisis came to Spain.
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