Spain downgraded as banks face €112bn hit

Tim Wallace
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Spains government took a huge step closer to financial collapse last night as credit ratings agency Fitch downgraded the state sharply, blaming the enormous projected cost of cleaning up the country’s troubled banking sector, the deep recession and soaring national debt.

Meanwhile Standard & Poor’s warned the country’s banks are set to lose €112bn (£90.6bn), a leaked IMF report showed the sector needs a €40bn cash injection, and Moody’s said house prices could fall by up to 52 per cent in tough economic conditions.

The government’s 10-year borrowing costs jumped in an auction yesterday, as investors worried the state will struggle to pay its debts.

Ministers had already warned the government was close to being locked out of borrowing markets, which would lead to the country needing a bailout like those given to Greece, Portugal and Ireland.

Fitch slashed the credit rating by three notches from A to BBB, barely above “junk” status, and kept the country on a negative outlook.

“The likely fiscal cost of restructuring and recapitalising the Spanish banking sector is now estimated by Fitch to be around €60bn (six per cent of GDP) and as high as €100bn in a more severe stress scenario compared to Fitch’s previous baseline estimate of around €30bn,” the agency explained.

“Debt is projected by Fitch to peak at 95 per cent of GDP in 2015 assuming a €60bn bank recapitalisation, compared to Fitch’s forecast at the beginning of the year of 82 per cent by the end of 2013.

“Spain is forecast to remain in recession through the remainder of this year and 2013.” the report added.

The report came as Standard & Poor’s warned that the recession will worsen banks’ problems, leaving them with between €80bn and €112bn of losses to recognise by the end of 2013.

The warnings added to the mountain of difficulties facing incoming Spanish central bank governor Luis Maria Linde, who will take charge of supervising the financial sector.

And a leaked IMF report claimed the sector needs a €90bn clean up, some of which should be covered by healthy banks. After some banks cover their own losses, the IMF believes another €40bn of external cash will be needed.

Spain’s government yesterday borrowed €2.07bn – above the €2bn target as demand remained relatively strong, but only after paying higher yield.

The 10-year bonds sold for a yield of 6.044 per cent, up from 5.74 per cent at a similar auction in April, but not yet at the dangerous seven per cent level beyond which Ireland, Greece and Portugal sought bailouts.

Investors favoured safer countries – yields on French 10-year bonds fell to a record low of 2.46 per cent.