IMF Says Spanish Banks Need More Capital in Stress Tests

Spain’s banking system would need 37 billion euros ($46 billion) in additional capital to cope with worsening economic conditions, the International Monetary Fund said in a report, which the country will use to help determine what international support it may seek for its lenders.

“The team’s stress tests show that while the core of the system appears resilient, vulnerabilities remain,” the IMF staff wrote in a report assessing the stability of Spain’s financial system released yesterday. While “the largest banks appear sufficiently capitalized,” there is “a group of banks where vulnerabilities seem highest and where public support seems most critical,” according to the report.

Spain may seek European aid as soon as today when finance ministers from the euro region hold a conference call, said a German official and a European Union aide, who declined to be identified because the matter is confidential. A bailout would make Spain, which is reeling from a recession and the bursting of a real estate bubble, the fourth of the 17 euro nations receiving aid after Greece, Ireland and Portugal.

“European banks are at the epicenter of our current worries and naturally should be the priority for repair,” IMF Managing Director Christine Lagarde said in a speech in New York yesterday.

The IMF said the actual capital needs for Spanish banks would be higher than 37 billion euros to include other costs that may be later identified. “Some costs additional to provisioning for potential losses may be unknown ahead of time and are therefore not possible to incorporate in the stress tests,” according to the report.

Adverse Scenario

The IMF used an “adverse” scenario for the tests that would see the Spanish economy contract 4.1 percent this year and 1.6 percent in 2013. That compares with a “baseline” scenario that foresees it shrinking 1.7 percent this year and 0.3 percent in 2013, according to the report. It also considers that the banks will need to comply with a core Tier 1 capital ratio requirement, a measure of financial strength, of 7 percent.

Spanish Prime Minister Mariano Rajoy said June 7 that he will wait for the IMF report and the results of studies due by June 21 by two consultants before choosing how to finance the recapitalization of the banking system.

The IMF, which says its tests covered 96 percent of the country’s domestic banking industry, categorized banks into four groups. The most vulnerable banks are former savings banks that have received state support.

Domestic Lenders

Spain’s access to markets is narrowing as the Treasury increasingly depends on domestic lenders to buy its debt, government data show. Foreign investors cut their holdings of Spanish debt to 37 percent of the total in April from 50 percent at the end of last year, weakening the government’s capacity to backstop its banks.

The collapse of the Spanish property boom in 2008 left lenders with more than 180 billion euros of what the Bank of Spain calls “problematic” assets linked to real estate. The government, in power since December, has passed two decrees making banks recognize deeper losses on loans to the property industry and foreclosed assets.

Spain’s credit rating was cut to within two grades of junk by Fitch Ratings June 7. It said the cost to the state of shoring up banks may amount to as much as 100 billion euros in the worst case, compared with its previous estimate of 30 billion euros, as Spain will remain in a recession next year.

A bailout for Spain might hurt credit ratings as the threat looms of a Greek exit from the single currency, Moody’s Investors Service said yesterday.

Moody’s said it may review the ratings of several euro-area nations because of developments in Greece and Spain, where growing estimates of the cost of cleaning up banks may prompt a downgrade of the nation’s A3 rating.

-- Editors: Gail DeGeorge, Brendan Murray

To contact the reporters on this story: Sandrine Rastello in Washington at srastello@bloomberg.net Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net James Hertling at jhertling@bloomberg.net

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