A €100 billion recapitalisation facility for Spanish banks that was agreed upon by European leaders over the weekend covers a housing market collapse on a par with the one experienced in Ireland, says Fitch Ratings, and is at the extreme end of its stress estimates. However, the bailout fund won’t solve the country’s underlying problems.
Last week, the rating agency estimated that the capital required for Spanish banks was approximately €60 billion, and it downgraded the Spanish sovereign three notches at the time. At that time, it put the high-end of its recapitaliation requirement estimates at €100 billion.
Fitch also estimated that losses on Spanish bank domestic loan portfolios would total €230 billion under its base case scenario, and up to €295 billion under an Irish-style case. In both scenarios, Fitch estimates are based on the amount of capital needed to reach a common equity-to-total assets ratio of 6.5%, which is equivalent to a core capital-to-risk-weighted assets ratio of 10%, once stressed losses, net of tax and existing loan loss reserves, are deducted from equity.
The rating agency says that it will comment on the bailout facility further once its specific details, including the timing, the allocations for individual banks and the result of independent valuations, are revealed. Although it does note that, “The recourse to external funding for the bank recapitalisation underscores the constrained financing flexibility of the sovereign to respond to adverse shocks.”
Nevertheless, it says that securing the funding to assist in restructuring its banking sector is consistent with Spain’s current sovereign rating. “If effective in restoring confidence in the banking sector and easing the fiscal burden of restructuring, such support would be credit positive,” it adds.
If Spain uses €60 billion of the bail-out fund, as Fitch predicts, it will put the country’s gross general government debt on a trajectory to peak at 95% of GDP in 2015, the rating agency says.
Research firm, CreditSights Inc., says that the proposed facility was not unexpected, and that it will buy Spain some time, while also improving Spanish banks access to funding. “A bank recapitalisation plan is likely to provide reassurance to markets and provide a boost to risk assets,” it notes.
“It is also beneficial to Spain to the extent that rising private sector defaults won’t precipitate insolvencies in the banks. But it won’t provide a lasting fix for the problems faced by Spain, and we still believe that a request for assistance to help the government fund itself is still on the cards,” it adds. Although this latest effort should buy the government some time before that’s necessary, it says.