Analysis: S&P throws Spanish banking crisis into sharp relief

Fri Apr 27, 2012 9:09am EDT
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By Sonya Dowsett and Jan Strupczewski

MADRID/BRUSSELS (Reuters) - Spain's latest credit rating downgrade has thrown into sharp relief the need to revive a banking sector that could need another 100 billion euros to cover bad debts in order to avoid exposing another weak flank in the euro zone crisis,

The options are clear: Spain's troubled banks seek fresh capital themselves, the government comes to their aid or euro zone funds are somehow pushed in their direction.

But while the need for new funds is pressing, policymakers have no clear idea how to proceed.

The problem is the banks are in no shape to attract investment, Madrid cannot offer much more help since a domestic bailout would worsen Spain's already parlous debt position, while Brussels rules out direct euro zone aid to banks.

Something will have to give.

Standard & Poor's cut Spain's rating by two notches to BBB+ late on Thursday, citing a budget deficit which is not falling as fast as planned and "the increasing likelihood that the government will need to provide further fiscal support to the banking sector".

A burst property bubble and a deepening recession have made it likely Spanish banks will need more money than previously thought to recapitalize. Left unchecked, the hole could push Spain towards a Greek-style bailout which the euro zone can barely afford.

Latest data show Spanish banks are carrying their biggest burden of bad loans since 1994. As the economy deteriorates, compounding households' problems in repaying debt, they are expected to need more than the extra 53.8 billion euros ($71 billion) the Bank of Spain has predicted.   Continued...

A woman passes a shop with a closing down sale in Madrid April 27, 2012. Spain's sickly economy faces a "crisis of huge proportions", a minister said on Friday, as unemployment hit its highest level in two decades and Standard and Poor's weighed in with a two-notch downgrade of the government's debt. Spain's unemployment rate shot up to 24 percent in the first quarter, the highest level since the early 1990s and one of the worst jobless figures in the world. REUTERS/Sergio Perez