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Can Spain’s banks stave off doomsayers?

The Spanish central bank prevented its financial institutions from investing heavily in the US sub-prime related securities. But Spain’s mid-tier banks are heavily exposed to a local property sector in crisis. Can they ride out the downturn? Peter Koh reports.

SPANISH BANKS ARE seeing a rapid increase in non-performing loans coming from the property sector, mortgage holders and small companies. Like banks everywhere, they are also finding the wholesale funding markets less than welcoming. But while the general collapse in confidence worldwide and the severity of Spain’s property crisis in particular has some investors spooked and on the lookout for any signs of trouble, the fundamentals of the picture, although by no means pretty, are not as bad as they might at first appear.

When the European Central Bank this September announced plans to increase the discount it applies to the unsecured bank bonds and asset bank securities that it accepts as collateral for loans, investors immediately singled out Spanish banks, particularly the mutual savings banks, the cajas, as those most likely to suffer.

The singling out of Spanish banks for their use of ECB loans, however, is unfair considering that they are by no means disproportionate users of the ECB’s lending facilities, unlike, say, German banks. It highlights the extent to which investors, panicked by dramatic events elsewhere and acutely aware of Spain’s deflating property bubble, are gloomy on the country’s financial sector.

Although there are plenty of reasons to justify the gloom – a million unsold homes, rising NPLs, slowing economic growth, rising unemployment, exposure to the property sector, and higher funding costs to name a few – the situation is unlikely to be one of doom as Spanish banks are probably better able than most to withstand such a storm and have, to date, held up noticeably better than many of their peers.

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