ECONOMIC INDICATORS

Santander among 28 Spanish banks cut by Moody’s on debt risk

BLOOMBERG FILE PHOTO/ANGEL NAVARRETE
BANCE SANTANDER SA and Banco Bilbao Vizcaya Argentaria SA were among 28 Spanish banks downgraded by Moody’s Investors Service, which cited the country’s sovereign debt and rising losses on real estate loans.
Posted 6/26/12

MADRID - Banco Santander SA – parent of Boston-based Sovereign Bank – and Banco Bilbao Vizcaya Argentaria SA were among 28 Spanish banks downgraded by Moody’s Investors Service, which cited the country’s sovereign debt and rising losses on real estate loans.

The lenders’ long-term debt and deposit ratings were cut by one to four levels, Moody’s said today in a statement. The New York-based rating company also downgraded 16 Spanish banks on May 17.

Moody’s issued a three-step reduction in Spain’s credit grade on June 13, citing the nation’s increased debt burden, weakening economy and limited access to capital markets.

Spain was lowered to Baa3, the lowest investment-grade rating, from A3 and remains on review for a further cut after announcing plans to borrow 100 billion euros ($125 billion) from European Union rescue funds to recapitalize banks.

The latest downgrade of banks reflects the government’s reduced creditworthiness, which lessens its ability to support the lenders, as well as Moody’s expectation that losses linked to commercial real estate will keep rising.

Moody’s downgraded 15 global banks last week, saying their capital-markets businesses suffered from volatility and the potential for “outsized losses,” according to a statement.

The ratings firm also cited the companies’ exposure to Europe. The ratings on Bank of America Corp. and Citigroup Inc. were cut to two levels above junk.

Banking Rescue

Concern that Spain will struggle to bail out its banks as their loan losses mount has driven up the country’s borrowing costs.

The extra yield investors demand to hold Spain’s 10-year bonds rather than German bunds ballooned to 517.4 basis points on June 25 from 479.9 basis points on June 22. A basis point is a hundredth of a percentage point.

Spain formally requested the banking bailout in a letter to Luxembourg’s Jean-Claude Juncker, who leads the group of euro- area finance ministers.

The government of Prime Minister Mariano Rajoy published results of stress tests on June 21 that showed Spain’s banks may need as much as 62 billion euros of capital to withstand a worst-case economic scenario.

Oliver Wyman Ltd. estimated banks would need 51 billion euros to 62 billion euros should Spanish gross domestic product shrink by 6.5 percent over three years and housing prices drop 60 percent from their peak.

Roland Berger Strategy Consultants said lenders would need 51.8 billion euros under those conditions.

The ratio of bad loans to total lending at Spain’s banks surged to 8.72 percent in April, the highest since 1994, from less than 1 percent in 2007, according to Bank of Spain data.

Lenders have 184 billion euros of what the regulator terms problematic real estate-related assets after taking property onto their books following the collapse of Spain’s property boom in 2008.

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