Spains surging bad loans cast new doubts on bank cleanup

Written by Bloomberg | Madrid | Updated: Apr 19 2012, 06:11am hrs
Spains surging bad loans are spurring doubt on whether the government can persuade investors that it can clean up the countrys banks without further damaging public finances.

Non-performing loans as a proportion of total lending jumped to 8.16% in February, the highest level since 1994, from less than 1% in 2007, according to Bank of Spain data published on Wednesday. The ratio rose from 7.91% in January as 3.8 billion euros of loans soured in February, a 110% increase from the same month a year ago. That takes the total credit in the economy that the regulator lists as doubtful to 143.8 billion euros.

Defaults are rising and credit is shrinking at a record pace as 24% unemployment corrodes the quality of loans built up in the countrys credit boom and saps the appetite of banks to make new ones. Doubts about the extent of Spains non-performing loans problem is hurting bank stocks and driving up the governments borrowing costs on investor concern that the expense of propping up ailing lenders may add to the debt burden.

One of our concerns in Spain is to what extent contingent liabilities could pass to the central government, said Andrew Bosomworth, Pacific Investment Management Co.s Munich-based head of portfolio management. Non-performing loans will have to rise when you take into account the unemployment rate and whats happening with the economy, he said.

Prime minister Mariano Rajoy is battling to convince investors Spains finances are under control after his refusal last month to meet deficit targets set by the European Commission. By seeking to cut the budget deficit to 3% of gross domestic product from 8.5% over two years, he risks driving bad loans as the deepest austerity measures in three decades push the economy back into a recession.

A lot of our doubts are based on the grounds that non- performing loans should increase, said Tobias Blattner, an economist at Daiwa Capital Markets in London, adding that he expects house prices still may fall by as much as 20 percent. That could make a further hole in balance sheets of the banks.

Bank shares extended declines on Wednesday after bad-loan figures were released. Banco Santander, Spains biggest lender, fell as much as 3% and CaixaBank SA, the fourth largest, dropped as much as 3.3%. Spanish bonds rose for a second day as the extra yield that investors demand to hold 10-year debt instead of German bunds narrowed to 404.5 basis points from 413.7 on Tuesday.