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Spain Receives Economic Warning From IMF

Wed 21st Apr 2010

The International Monetary Fund (IMF) today reported that Spanish banks will require 22 billion euros to cover the loss of value of assets if the financial crisis gets any worse, and predicts that bad debt will continue to rise.

The study, which was as a collaboration with the Bank of Spain, predicted how non-performing loans and the recovery of property for nonpayment is expected to rise, which will weigh heavily on the economy.

The IMF report how savings banks are especially vulnerable, and it called for a comprehensive restructuring of the sector before June, when the Banking Ordinance Restructuring Fund (BORF) is due to expire.

Given that the drop in property values and the recession have been more pronounced in Spain than in the rest of the Euro zone, some analysts have questioned whether the financial sector has the reserves required to be able to withstand the blow, even though Spanish banks entered the crisis with more reserves than in other countries.

The IMF has attempted to address these points in its "Global Financial Stability Report", released today, which devoted an entire section to Spain. The IMF's initial report was based on the assumption that financial forecasts would be met and that the crisis would slow down.

This being the case, 6.3% of bank loans will be in arrears by the end of 2010 (6% in the case of savings banks), but there is expected to be an improvement by 2011, the bad debt will have fallen to 5.1% and 5% respectively.

Should this happen, the losses would be 1 billion for banks, with 6 billion for savings banks due to their incomes being lower and their having a larger portfolio of properties owing to defaulting on mortgage payments, according to the IMF. The IMF said that the income and provisions of the financial sector would allow for these losses to be fully absorbed.

However, the IMF also submitted the financial system to a tougher hypothetical test, using a more pessimistic scenario in which unemployment exceeds 24% in 2011, as occurred in 1994, with housing prices falling 15% this year. In this case, bad debt would jump to 7.8% for banks and 7.1% for savings banks in 2011. After taking depreciation into account, the banks would lose 5 billion euros in capital and the savings banks 17 billion.

Nevertheless, the possible losses "are relatively small compared to the overall capital of the banking system," according to the IMF.

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