The Bank of Spain disclosed on Friday that the value of bad loans held by the teetering Spanish banking sector increased a third over the last year to €148bn, amid mounting concern that the country is now the front line in preventing Greece’s political crisis from pulling down the rest of the eurozone.
“The battle for the euro is going to be waged in Spain,” Luis de Guindos, Spanish finance minister, told the Financial Times. “It is a large economy with an orthodox government implementing orthodox policies.”
Spanish banks have seen mortgage arrears skyrocket since a housing bubble burst three years ago. Loans in arrears accounted for 8.4 per cent of the sector’s entire loan portfolio in March, by far the highest since the real estate market began to collapse.
Concerns over Spain’s banks have mounted in recent days after Madrid was forced to nationalise Bankia, the conglomerate created 17 months ago out of several smaller savings banks that were brought down by bad real estate loans.
Bankia shares plunged nearly 30 per cent on Thursday on fears of a run on the bank before recovering after government denials. The shares regained all of their value on Friday, rising more than 25 per cent. The Spanish government has tapped Goldman Sachs for advice on Bankia’s restructuring, which is expected to require €12bn to €15bn in additional equity.
Despite the turn-around in Spanish banking shares, officials warned that Spain was becoming the first eurozone country to suffer from the instability in Greece, where anti-bailout parties have continued to show strong support in polling ahead of next month’s repeat national elections. EU leaders have warned that a rejection of the bailout would lead to a Greek exit from the euro.
“You are looking at the implications of the Greek situation for Spain and Italy,” said Mr De Guindos. “Greece is the canary in the coal mine.”
The data released by the Bank of Spain showed a slight increase in deposits in Spanish banks through the end of March, and Bankia officials insisted any withdrawals since nationalisation were a reflection of normal seasonal adjustments. But the Bank of Spain numbers also showed a continued exodus by foreign depositors from Spanish banks, who withdrew €31bn over the course of the month.
Megan Greene, director of European economics at Roubini Global Economics, said while there did not appear to be a Greece-inspired bank run in Spain, the sector would eventually need an injection of government money to stay afloat, forcing Madrid to turn to the EU for help.
“Spain doesn’t have enough money,” Ms Greene said. She argued the country would eventually need a full-scale bailout as its borrowing costs continued to rise, in part because of Greek instability.
The European Commission has offered to delay tough new deficit targets for Spain by a year to prevent its economic recession from getting deeper, but Mr De Guindos said his country did not want any loosening in the targets, which require Madrid to lower its deficit to 3 per cent of economic output next year. “We are going to stick to our commitments because this is the only way out.”
Additional reporting by Ben Hall in London