Moody's has just increased its estimate for loan losses by Spanish banks by a sizeable 63 percent.
The new loss estimate is now €176 billion—nearly one quarter of a trillion U.S. dollars. What may be worse is this: Moody's states that the banks have only recognized half of those projected losses. Moody's also criticizes the current levels of capital cushions, stating that those reserves must be increased in order for Spanish banks to sustain the coming losses.
The report cites adverse economic conditions and deteriorating asset quality. Moreover, Spanish banks may face difficulty recapitalizing.
Needless to say, Moody's has reaffirmed their negative outlook.
As I wrote on Friday, there has been no shortage of bad news for the financial sector in Spain.
The overall economic condition is grim, according to the authors of the report.
"'The severe economic contraction that Spain has faced since the second half of 2008 is expected to depress growth into 2011. As a result, banks will face a challenging economic environment for a prolonged period of time, pointing to negative prospects for asset quality and earnings," they argue.
One imagines that, when it comes to the relationship between a weakening economy and a strained banking system, it becomes difficult to separate cause from effect.
The European Union summit begins in Brussels on Thursday.
It's a safe bet to suspect that this topic will get much discussion—whether it is officially acknowledged or not.
If you enjoy the neologism 'ringfence'—especially when used as a verb—this may be a banner weak for you.
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