The Troika’s concern for the Spanish financial system

For all the reassuring messages conveyed in the preliminary statement on the Spanish financial system, the Troika is far from convinced that measures undertaken will deliver sound results. When solvency is at stake any precautionary measure is subject to close and severe scrutiny. The more demanding coverage on refinancing stands as a hallmark of the clumsy way authorities are dealing with underlying problems. For this slippage was well known by supervisory authorities and yet they chose to conceal it in the winter visit made by the Troika delegation.

Thus the Troika team is firmly convinced that the €10 billion the Bank of Spain reckons to stand as a maximum figure for extra provisioning widely underestimates potential liabilities. They believe that €20 billion could prove more accurate. If you add up further needs stemming from bad loans, question marks arise on the ability financial entities may have to face such a bill. In particular when profits are plummeting providing a narrow room of manoeuvre to cover unforeseen needs.

The Troika tends to share the German view that further capitalisation may be in the pipeline. The more so as recession is rapidly eroding balance sheets, forcing banks to undertake huge adjustments before the end of the year.

These concerns will not surface in the final report to be delivered. Yet they add up to a downward sentiment on Spanish financials. Lacking enough resources to shore up potential contingencies they might be forced to ask for further assistance under the rescue umbrella. A prospect flatly rejected by the authorities for the time being but likely to materialize the next year should recovery fail to gather momentum. Impaired assets are piling up with little hope the current drive could be reversed.

A gloomy view on the Spanish financial system with the potential to fuel unsettling conditions unless they can be duly subdued. An unpalatable prospect that might end up in further draw-backs from the European rescue fund before the end of this year.