Analysis: Spain's banks may need more public cash

Thu Mar 29, 2012 7:58am EDT
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By Sonya Dowsett and Julien Toyer

MADRID (Reuters) - Spanish banks, already hurting from a property crash, are facing a new wave of loan defaults as the economy sinks into recession and the government may have to find more money or ask Europe for help in filling the funding gap.

Prime Minister Mariano Rajoy has ruled out asking for European aid which would come with difficult conditions and injecting more state money would also be unpalatable given the bad fiscal situation and rising borrowing costs.

But both ideas have resurfaced due to fresh concerns over Spain's lenders.

Loan defaults have reached their highest level in 18 years, moving the focus beyond the exposure the real estate crash to banks' entire 1.8 trillion euro ($2.39 trillion)loan book.

The impact of the second round of cheap European Central Bank loans on the banking system is wearing off and no suitor has stepped forward for large domestic bank Bankia (BKIA.MC: Quote).

All these problems have highlighted the shortfalls of a banking sector reform the government introduced two months ago, aimed at mopping up real estate losses through mergers and costs savings without dipping into state funds.

Many analysts say banks will need more money.

"The Spanish banking sector as a whole is likely to need more capital support from the state," credit ratings agency Fitch said in a note.   Continued...