Spanish banks poised to face trouble

Fears contagion might leak to neighboring countries has shattered confidence. Moreover, as monetary policy in the US increasingly becomes less accommodative, pressure on emerging countries will build up.

Just figure out the damage a run on Brazilian or Mexican currencies might inflict on the two biggest Spanish banks. Profits from subsidiaries helped in financing their huge domestic balance sheet reshuffle. Yet, as foreign business is poised to face rough times, they risk being trapped in a lose-lose game. Dwindling earnings coupled with exchanges losses and mounting impairment might dent their solvency sooner than expected. Even if a mild recovery seems underway in Spain, it will take some time before the current uninspired record in the credit portfolio can be reverted. Should investments in Latin America enter into dangerous territory, they are up for a bumpy ride.

The forthcoming stress tests may add additional worries. The latest dashboard disclosed by the EBA last Friday shows a grim picture for Spanish banks. While their capital ratios stand close to average, credit risk and asset quality fail to prove reassuring. Forbearance and impairment run high. The refinancing cleaning up has fallen short of its inceptive ambitious goals. Further allowances will be required for filling the existing gap.

In addition, should ECB call into question the false surmise public bonds are risk-free when supposedly kept till maturity, this move would wreak havoc on balance sheets. While many observers bet the ECB will shrug off from taking such a bold step, accounting Spanish sovereigns on similar terms as German bunds would severely undermine the banking health check overall credibility. No wonder most investors in the Stock Exchange remain wary of financials deeming they might not avert becoming plausible lame ducks.