Spanish Mortgage Quality Shows ‘First Cracks’, RBS’s Gallo Says

Spanish mortgage loans are starting to show the “first cracks” in their quality, said Alberto Gallo, head of European macro credit research at Royal Bank of Scotland Group Plc.

The risk that mortgage loan default rates could double in the next three years is “a good guess, having looked at the experience of other periphery countries,” Gallo said on a conference call with reporters today. Asset risk will continue to erode bank capital across the so-called European periphery including Spain and Italy, he said in a report published.

While this will mean lower profitability for stronger banks, “weaker lenders may not be able to earn their way out of bad loans and could have to use subordinated debt to recapitalize themselves,” London-based Gallo said.