Via Barclays Capital’s Monday economics morning comment (our emphasis) :
Savings banks’ profits have declined by 32.7% to €3.4bn in H109 according to the Ceca, the Spanish confederation for savings banks, mainly due to growing non-performing loans. They reached 5.17% at the end of August, up from 3.6% in December 2008. (Les Echos).
The Spanish government will put pressure at the upcoming G20 summit in Pittsburgh for interest rates to be maintained at a low level “for a sufficient period of time”, as expressed in an official document presenting Spain’s position prior to the G20. It is also ready to raise its contribution within the IMF under an EU coordinated agreement. (El Pais).
CECA, of course, is not only a credit institution but a major provider of financial services to Spanish savings banks and other financial entities. Altogether the group represents around 50 per cent of the Spanish financial system, and is one of the main forces underpinning savings banks’ liquidity positions. Accordingly, it’s a good barometer for the state of non-performing loans countrywide in Spain.
The two points above are also highly inter-related. Spain, more so than other western European country, is hugely vulnerable to prospective interest rate increases due to its high unemployment rate and still weakening economic position. Spanish savings banks, meanwhile, are the country’s most vulnerable institutions due to their high share of retail mortgages.
Moody’s appeared to identify a potential weakness when it downgraded CECA’s bank financial strength rating to C from B- and applied a negative outlook on all its ratings last week. The credit agency added:
The negative outlook on all the ratings reflects Moody’s view that CECA could still come under pressure if in this current uncertain environment loss assumptions increase significantly above the rating agency’s current expectations or if other factors determining the bank’s risk absorption capacity deteriorate to the degree that its capital and earnings are affected.
It should, however, be noted that CECA’s rating, as it stands, still incorporates Moody’s understanding of systemic support — due to the institution’s prominent role in the savings bank sector; that is, the ratings account for the institution being bailed out by the Spanish government in the event of any liquidity troubles.
In that sense, one could compare CECA to Spain’s version of US government-sponsored enterprises like Fannie Mae and Freddie Mac.
On the plus side, however, at least the Spanish government is making contingencies – a) by boosting revenues from bond issues and b) by sending the former head of its government debt agency to represent the country in Brussels. As Bloomberg reported last week (our emphasis):
Sept. 18 (Bloomberg) — Gonzalo Garcia, who leads the Spanish Treasury’s financial analysis department, will become the new head of government debt at a time when Spain is stepping up bond issues to plug a swelling deficit. Garcia, 35, has worked at the Treasury for 10 years and will begin the new position on Sept. 28, he said yesterday in an interview. Garcia replaces Enrique Ezquerra, 37, who becomes an economic adviser at Spain’s Permanent Representation to the European Union, said a Finance Ministry official who declined to be identified in line with policy. Spain’s deficit is set to reach more than three times the European Union limit this year on falling revenue and stimulus spending triggered by the worst recession in 60 years.
Spain plans to issue 88 billion euros ($130 billion) of debt this year, of which it had issued 64.5 billion euros by the end of June, according to information on the Treasury’s Web site. Moody’s Investors Service rates Spanish debt Aaa and the country has a lower debt burden than some European peers. Spain had a debt-to-GDP ratio of 40 percent at the end of 2008, compared with 69 percent in the euro region. Deputy Finance Minister Carlos Ocana said on July 28 that public debt will amount to around 50 percent of gross domestic product at the end of this year.
European rules set a debt ceiling of 60 percent. Budget Cut Ezquerra will defend Spain’s interests in Brussels at a time when the European Commission has given the government until 2012 to slash its budget deficit to the EU limit of 3 percent of GDP from the 9.5 percent the government forecasts for this year.
Related links:
S&P sees “meaningful financial stress” for Spain’s banks – €96.5bn worth – FT Alphaville
Scrutiny of Spain’s potential banking pain increases – FT Alphaville
Are Spanish banks hiding their losses? – FT Alphaville