April 5 (Bloomberg) -- The outlook for Spain’s banks remains negative as recession threatens to push up loan defaults across all asset classes in the euro area’s fourth-largest economy, Moody’s Investors Service said.
“The main driver of the outlook is the rating agency’s expectation that the banks will continue to operate in a recessionary environment burdened by high levels of non-performing assets that are expected to significantly deteriorate further,” Moody’s said in a statement today.
An economic slump entering its sixth year is driving up loan defaults for banks already struggling with the impact of low interest rates and weak credit demand. Bad loans as a proportion of total lending stand at 10.8 percent after about 160 billion euros ($208 billion) of credit turned sour since early 2007 amid the country’s property crash.
Moody’s said it’s monitoring the impact of legal rulings and government decisions that could affect Spain’s 600 billion-euro stock of mortgages. The Spanish government announced proposals in January that may widen the scope for partial mortgage debt forgiveness, while the European Court of Justice ruled against Spain’s legal framework, which it considered to be in violation of consumer protection laws.
Any potential increase in residential mortgage losses “could challenge the solvency of a much broader group of banks than those having suffered from the real estate crisis and could increase the negative rating pressure for most Spanish banks,” Moody’s said.
Moody’s said its outlook on Spanish banks, which has been negative since 2008, also took into account their high reliance on funding from the European Central Bank, their credit exposures to the Spanish government and their restricted access to funding markets.
“Improved bank-capital levels, partly because of current recapitalization efforts, do not fully offset these sources of rating pressure, especially if the economy does not improve notably during 2013,” Moody’s said.
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