Spain bank recapitalisation insufficient: Moody’s

October 1, 2012

, MADRID, Oct 1 – A planned recapitalisation of struggling Spanish banks will help shore up confidence but the amount in rescue funds sought by Madrid is not enough to keep the banks stable in stress situations, Moody’s said Monday.

“Recapitalisation will materially enhance the solvency of affected institutions and help restore market confidence in Spain’s banking system as a whole,” said the ratings agency.

“However, the recapitalisation amounts published by Spain are below what we estimate are needed for Spanish banks to maintain stability in our adverse and highly adverse scenarios,” added Moody’s.

The agency believes that the banks would require between 70 and 105 billion euros ($90-$135 billion).

However, an audit carried out by US financial consultancy Oliver Wyman said Friday that Spanish banks need 59.3 billion euros to fix their balance sheets, which have been severely weakened by a property market crash in 2008.

Based on that audit, the Spanish government said therefore that banks may only need to borrow 40 billion euros from the eurozone, far below the maximum on offer of 100 billion euros.

But Moody’s noted that “if market participants are sceptical about the stress test, negative sentiment could undercut the government’s efforts to fully restore confidence in the solvency of Spanish banks”.

The ratings agency had said late August that it was holding its review of Spain’s credit rating until late September pending more clarity on the European Stability Mechanism and moves for a eurozone banking union.

It has yet to issue its revised credit rating assessment for Spain, with any downgrade putting the country into speculative territory or “junk bond” status.

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