Spain Banks Face Moody's Downgrades as Bankia Run Denied

 

Spanish banks face credit ratings downgrades by Moody's Investors Service as the government denied there was a run on deposits at Bankia SA, the ailing lender it's taking over.

Moody's is expected to make a statement on downgrades for Spanish banks as early as this evening, two people with knowledge of the situation, who asked not to be identified because the decision hasn't been announced, said today. A Moody's spokeswoman in London declined to comment in a phone interview.

A cut in credit ratings for Spanish lenders would cap a tense day for the industry after a report in El Mundo newspaper that about €1 billion of deposits had been pulled from Bankia since the government announced plans to take it over on May 9. Bankia's shares plunged as much as 29%.

Deputy Economy Minister Fernando Jimenez Latorre used a Madrid news conference on the country's GDP data to deny Bankia was suffering a flight of deposits. Bankia, the lender with the biggest Spanish asset base, said in a filing to regulators today that changes in deposit level in the first half of May "have a substantially seasonal nature" and that it didn't expect "substantial changes" in coming days. The main drivers for Moody's expected action on Spanish banks today are rising loan defaults, a renewed recession, restricted funding access and the reduced ability of the government to support lenders, said one of the people familiar with the plans. The Spanish newspaper Expansion reported plans for the downgrade earlier today.

Doubts about the health of Spain's banking system have helped drive up the country's borrowing costs on concern about its ability to cover losses caused by a real estate collapse that threatens to force some lenders to seek state aid. The yield on 10-year Spanish government debt climbed 3 basis points to 6.3% today as the spread over German bunds widened to 489.2 basis points from 482.2 basis points yesterday.

The government said on May 11 it would require banks to set aside about €30 billion to cover potential losses on real estate loans that are still performing.

That's on top of €53.8 billion of charges and capital ordered in February. Economy Minister Luis de Guindos said the latest banking cleanup would mean the state would inject less than €15 billion in struggling banks.

The property slump has caused bad loans on the books of Spanish banks to rise sharply as they take physical real estate such as apartment blocks and land onto their balance sheets as developers miss payments. The nation's lenders carry €184 billion of what the Bank of Spain terms "problematic" real estate-linked assets and the ratio of bad loans to total lending has surged to 8.16% in February compared with less than 1% in 2007.

Moody's cut the debt rating of Spain to A3 from A1 on Feb. 13, citing Europe's debt crisis and downgraded 26 Italian banks on May 14. Standard & Poor's, another ratings company, cut its credit ratings for 11 Spanish banks, including Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, the two biggest, on April 30.