Spanish Bad Loans Surge to Highest in 17 Years as Lending Falls: Economy
Spanish banks reported more bad loans and lower lending and deposits in October, hurt by the fallout of the country’s property crash and the European sovereign debt crisis.
The ratio of bad loans as a proportion of total lending climbed to 7.42 percent, the highest level since 1994, from 7.16 percent in September and 5.68 percent a year earlier as the value of borrowings in default rose to 131.9 billion euros ($171.9 billion), the Bank of Spain in Madrid said in a statement today. Lending fell 2.5 percent from a year ago, following a record 2.6 percent drop in September, and deposits slid 2.2 percent to their lowest level since 2008.
Rising defaults and declining loans and deposits show how banks are suffering from the fallout of Spain’s property slump and a wider European debt crisis that has shut them out of wholesale debt markets. Spain’s Prime Minister-elect Mariano Rajoy, who is making an inaugural speech to parliament today, said that a “second wave” of restructuring of Spain’s banks is inevitable, including more mergers.
“What we have been saying for a while, and I think the banks themselves have been in denial on this, is that the asset quality decline has not bottomed out yet because unemployment is still going up,” said Inigo Lecubarri, who helps manage about $300 million at Abaco Financials Fund in London. “A non- performing loans ratio of 7.4 percent is already very bad. Ten percent would be catastrophic and it’s not impossible we could get there.”
Restructuring
Rajoy has pledged a cleanup of the banking industry, which is laboring under the weight of 176 billion euros of what of the Bank of Spain terms “troubled” assets linked to real estate. That’s curbing lending and restraining Spain’s economy, where unemployment is 23 percent, the highest in the European Union.
Rajoy will push through the “culmination” of the restructuring of the industry in the first six months of 2012 to help credit flow, he told parliament today. He said banks must cleanup their balance sheets by selling off finished property and carrying out a “very prudent” valuation of less-liquid assets such as land and unfinished real estate projects.
Euro Nervousness
Spanish bank deposits are shrinking at a time when lenders are being forced to compete for funds between themselves and also with the government, Lecubarri said. The backdrop of the debate over the future of the euro doesn’t help, he said.
“The Spanish tend to trust their financial institutions in general and haven’t tended to take their deposits out,” he said, adding that he sees a greater risk of savings flight in Italy. Deposits by Italian households and companies excluding banks fell an annual 0.6 percent in October, the most in five months, the Bank of Italy said Dec. 7.
Rajoy, who is set to take office on Dec. 21 after an election last month, said that Spain may miss its 2011 budget- deficit target of 6 percent of gross domestic product. He said the government needs to cut the deficit by 16.5 billion euros in 2012 and that his priority will be to stimulate economic growth and employment.
European construction output fell for a third month in October as production declined in France and the Netherlands, data from the European Union’s statistics office in Luxembourg showed today. Construction in the 17-nation euro region dropped 1.4 percent from September, when it fell a revised 1.5 percent, which was the biggest drop since December 2010.
Separate data from Asia today also suggested weakening demand. Japanese department store sales fell 1.9 percent in November from the same month a year earlier, the Japan Department Store Association said in Tokyo.
In New Zealand, reports showed consumer and business confidence is weakening. An index of household sentiment fell to 101.3 this quarter from 112 in the three months through September, Westpac Banking Corp. and McDermott Miller Ltd. said. Business confidence sank for the fourth time in five months in December, ANZ National Bank Ltd. said in a separate report.
To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net
To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; Edward Evans at eevans3@bloomberg.net
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