All The Latest On Spain's Banking Disaster

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Photo: John Picken via Flickr

Spanish banks are once again stoking the fires of euro worries.Three headlines in the last 24 hours have renewed focus on the deterioration of the country’s fiscal position:

  • Downgrades of 11 Spanish banks—and negative ratings watch actions on five more—by ratings agency Standard & Poor’s have highlighted connections between the banking sector and the Spanish government (which saw its long-term credit rating slashed last week).
  • Further, data published by the Spanish National Statistics Institute today showed that the domestic economy had contracted at a rate of 0.3 per cent in the first quarter, or 0.4 per cent from a year ago.
  • The Financial Times reports that Spanish officials are in talks to funnel banks’ toxic assets into a publicly supported “bad bank” in order to avoid the need for external bailout funds. This is the latest in a series of recent reports citing Spanish officials that suggest a bad bank is in the works.

This last development is causing the most hubbub today, as it is much the same path Ireland took to support its failing banks two years ago, however the government ultimately stumbled under the weight of those banks’ debts and was forced to seek extra help anyway.

That said, Spain’s bad loans as a percentage of GDP is much lower than Ireland’s was when it finally received a bailout back in 2009. Officials have designated some €175 billion ($231 billion) in Spanish banks’ real estate assets to be “troubled.” This amount is equivalent to 16.3 per cent of GDP. When Ireland received a bailout back in 2009, the National Asset Management Agency (Ireland’s flavour of bad bank) was helping lenders to manage €72 billion ($95.5 billion) in bad assets, some 36 per cent of Irish GDP at the time.

Admittedly, Spanish banks’ bad assets could continue to rise amid economic turmoil (bad assets already comprise a euro-era record of 8.2 per cent of loans), but the differences between Spain and Ireland are contributing to investor uncertainty over whether or not this is a step in the right direction for Spain.

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