Every successful movie turns into a remake. Much the same happens to the Spanish banking industry for quite the opposite reason. It escaped from utter collapse last year propelled by fresh money injected out of the European rescue fund. This helpful life-jacket coupled with the invigorated message by Draghi provided the adequate blend to fend off speculation. Banks enjoyed a favourable climate for undertaking a deep across-the-board restructuring. Bankrupt entities were revamped while solvent ones benefiting from a less stringent environment easily wrote off bad loans from their balance sheets.
Yet, recession is wreaking havoc on their ability to face mounting impaired assets. Falling margins falling allow them less ample room to build up provisioning. Should the economy continue its steep downward path, sooner or later banks will face again the grim prospect of potential insolvencies. It may only affect a limited number of middle size entities. But the very prospect they might run into trouble sends shivers down the spine to the sector as a whole.
Rumours on Spanish financial system’s solvency are once again surfacing. English media were, as usual, the forerunners in conveying unpalatable news. But once the German chancellery has voiced its concern on the extent balance sheets might conceal rotten assets, anxiety has once again returned to the markets. The Bank of Spain has promptly reacted by promising a thorough scrutiny on refinanced loans to ensure they are properly covered. No easy task as it involves addressing a huge €200 billion portfolio. It is reckoned that up to 40% might prove to need extra provisioning, a formidable challenge when profitability is performing a free-fall.
Rumours openly point to a further rescue package to save the day. It may take months to come but many are taking for granted that a fresh call for help might be launched at the end of the year, once the new German government takes over. Gossips on a deal providing early green light to such a move openly circulate in Madrid political circles. The Opposition leader’s call for investing the €60 billion rescue fund facility remnant shows he was all too aware that a further salvage operation might be in the pipeline.
Madrid counts on banks being able to tap on such funds, involving no direct public liabilities. But should that prospect materialize, no one believes lenders to bear the brunt of potential insolvencies. You can bet the State will be forced to guarantee any ensuing loss. Indebtedness and deficit might on face value look much abated. But at the end of the day any entity proving unable to pay back would trigger the obligation for Spain to foot the bill.
While discussion on whether banks would enjoy direct financing from the rescue fund seems utterly premature, the distressful prospect they might need extra money weighs high on sentiment. For all their massive restructuring, renewed speculation on their frail stability is bound to nurture further doubts on its overall solvency. The worst omen when you are stuck in a recession.