Bad loans batters Spain’s weak banking sector

Spain's banks reported Friday record high bad loans in August, revealing persistent balance-sheet weakness despite a eurozone-funded bailout. The news contrasts with other recent positive reports about the country's banking sector.

Bad loans batters Spain's weak banking sector
Photo: postopp1/Flickr

Bad loans rose from the previous month by €2.0 billion ($2.7 billion), or 1.13 percent, to an unprecedented €180.7 billion.

That represented 12.12 percent of all credit extended by Spain's banks, up from 11.97 percent in the previous month.

Bad loans in Spain, mostly linked to the collapsed property sector, have now hit a record high for three straight months.

"This continues to highlight the unrelenting pressure on the Spanish banking sector," said Raj Badiani, economist at London-based economic analysts IHS Global Insight.

Loans were likely to shrink in the months, and the resulting lack of credit would choke off any potential economic recovery, he said in a report.

"Furthermore, the overall shrinking supply of credit is being accompanied by nervous households and firms consolidating their debt levels in the face of the prevailing recessionary conditions hanging over the economy," Badiani said.

Last year, the eurozone agreed to finance a rescue of Spain's banks, swamped in bad loans since a property bubble imploded in 2008 plunging the country into a double-dip recession.

Spain's government says the latest two-year downturn, which has left the unemployment rate at a staggering 26.26 percent, came to an end in the third quarter of this year.

"Although the economy appeared to level off in the third quarter after contracting for nine successive quarters, we argue that Spain slipping out of recession is a technicality, bolstered by a stronger than normal tourism season," Badiani said.

"The country remains gripped by protracted and severe downturn with other key indicators like employment, industrial output and retail sales, with bank lending still heading south."

Spain, the eurozone's fourth-largest economy, has so far withdrawn €41.3 billion from the eurozone rescue loan.

EU officials last month hailed the strengthening of Spain's banking sector since the rescue but warned that a drop in lending and high debt levels posed a risk.

Spanish banks were regaining access to funding on the markets and their deposits have been rising, the European Commission and the European Central Bank said in a report.

But the report also warned that bank profits could take a hit as the Spanish government and private sectors tried to lower debt and as the property sector sank further.

On Monday after a meeting of the eurozone's finance ministers, Eurogroup head Jeroen Dijsselbloem Spain should be able to avoid any further rescue packages of its banking sector.

Dutch Finance Minister Dijsselbloem, who heads the Eurogroup of the 17 eurozone nations, said finance ministers had reviewed positively the situation in Spain, whose overextended banks had to be bailed out in June 2012.

Spain was rescued to the tune of €100 billion, and has used €41.3 billion of these funds to date.

But the country's "economic and budgetary outlook has improved," Dijsselbloem said, with Madrid set to complete its rescue programme by year-end.

Whether Spain would need "accompanying measures" to get them through the transition would be discussed in November, he added.

"The general idea is that the bank (rescue) programme will be shut down at the end of the year," he said at a press conference at the end of meeting.

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