Spain Hit By Fears on Banks

Fears about a potentially messy Greek exit from the euro zone washed up on Spain's shores on Monday, pulling local stock prices to lows not seen in eight and a half years as the country's borrowing costs continued to soar. Analysts warned that the ripples of a Greek exit would be stronger in vulnerable economies like Spain's, whose companies, banks and government rely heavily on foreign funding. Those flags came amid ongoing concerns about Spain's public finances and the health of its battered banking sector. On Monday, Moody's Investors Service warned that Spanish banks will remain vulnerable to rising loan delinquencies even after they set aside an additional €30 billion ($39 billion) in provisions against real-estate loan losses. Separately, Fitch Ratings Inc. said any disorderly exit by Greece from the euro would lead to widespread market disruption and severely weaker growth prospects in vulnerable economies such as Spain. On Friday, the Spanish government told banks that they must bolster their provisions to protect themselves against potential losses from loans to real-estate developers that aren't currently considered to be at risk of default. The new provisioning measures come after the government took a 45% stake in Bankia SA, BKIA.MC -8.93% Spain's fourth-largest bank by market value. On Sunday and early Monday, lenders detailed the impact of the new provisioning rules on their earnings. As expected, Bankia is taking the biggest hit, saying it would set aside €4.72 billion to meet the new requirements. Banco Popular Español SA, POP.MC -4.37% which has a balance sheet that is roughly half the size of Bankia, said it would set aside €2.31 billion, but ruled out having to ask for state aid to cover the provision. Following the lenders' disclosures, the country's key IBEX-35 stock market index fell 2.7%, hitting lows not seen since October 2003. Spain also paid higher interest rates when it sold Treasury bills Monday, a bad omen ahead of a longer-dated bond offering Thursday. After the auction, the yield on Spanish 10-year sovereign bonds rose to its highest level since November, settling at 6.24%, a level that many analysts see as unsustainable. Spain's latest effort to shore up its banks is its fourth in three years. While the added provisions will improve the capacity of banks to absorb losses, the institutions remain vulnerable to the country's economic recession and continuing real-estate crisis, Moody's said Monday. "We expect problem loans and loan losses to grow further, including in loan categories such as residential mortgages, loans to small and midsize enterprises and consumer finance," senior analysts Alberto Postigo and Tobias Moerschen wrote in Moody's weekly credit outlook. Spain's latest bank plan has some of the same problems as the previous three, namely that it doesn't address all the problems in the sector and that the amount of public support is lower than many believe is needed, economists said. The latest plan "has left many questions unanswered, and is unlikely to be sufficient to assuage investor concerns towards the health of the financial system and its impact on Spanish growth and the government's fiscal accounts," said Guy Mandy, an interest rate strategist at Nomura International. Moody's said that a recession in Spain will lead to deeper losses in segments such as residential mortgages, loans to small and mid-size enterprises and consumer finance. None of these areas were covered in Spain's latest bank-sector overhaul. The credit-ratings firm expects Spain will need to inject some €50 billion into the sector, compared with a government estimate of €15 billion in fresh support. "This will likely further increase Spain's already elevated public debt burden," Moody's wrote Monday.

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