Fears over Spain’s precarious fiscal situation continue to mount. Yesterday, Standard & Poor’s downgraded Spain’s sovereign debt by two notches, to BBB+. The yields on government bonds rose, as did the volume of commentary that suggests the country will need a bail-out.
The state of Spanish banks represents the biggest worry. The country’s property bust is only halfway finished, if Ireland’s experience is anything to go by. Spain’s aggressive commitment to austerity and eye-watering unemployment rate are also major concerns, particularly when it comes to borrowers keeping up with their sizeable debt burdens.
For his part, Alfredo Saenz, chief executive of Santander, thinks that anyone citing mortgage delinquencies as a problem for the Spanish financial system is “saying something stupid”. It is difficult to explain, however, why Spain’s modest mortgage delinquency rate, at less than 3%, looks so out of sync with its extreme unemployment rate, at nearly 24%. A non-performing mortgage ratio on par with Ireland’s would boost the stock of dud housing debt in Spain nearly five-fold. A decline in loan quality on this scale would indeed push many Spanish lenders into a bail-out.
Limiting the rescue to the country’s banks—without also pushing the beleaguered sovereign over the edge—is the best case scenario for Spain, according to the Economist Intelligence Unit. To some, this makes us sound stupid. It is a risk we are willing to take.
The EIU's Financial Services Briefing delivers a complete picture of the finance industry in markets around the world, combined with five-year forecasts of key sub-sectors.