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Spain Bank Audit Brings Relief, but for How Long?

European stock markets climbed higher on Monday, with investors relieved that Spanish banks' capital needs were no greater than initially expected. But stocks could come under pressure again, analysts warned, saying the review of banks' capital needs was just a first milestone in a long series of steps that need to be taken to restore investors' confidence.

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Carlos Sanchez Pereyra | Photographer's Choice | Getty Images
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Spain's IBEX 35 index traded higher with help from the country's banks such as Caixabank , Banco de Sabadell and Banco Santander .

Scott Nations, chief investment officer at NationsShares told CNBC that the relatively positive outcome of Spain’s stress tests was helping investors to shrug off negative manufacturing datareleased on Monday.

“We have found out that Spanish banks are only 60 percent as broke as we feared,” he said. “I think people were really worried that the Spanish banks were going to need as much as 100 billion euros.”

Nicholas Spiro, Managing Director at Spiro Sovereign Strategy believes the recapitalization amounts could have been a lot worse, but he is not convinced Monday's gains are solely down to these announcements.

“I wouldn’t read too much into this,” he told CNBC.com. “There is very little conviction in this rally and sentiment could easily turn.”

Spiro argued that the 60 billion euros that Spanish banks need is the same figure that was talked about earlier in the summer. As the Spanish economy has since deteriorated further, capital injections should surely increase accordingly, he said.

According to Spiro, plans to set up a “bad bank” into which toxic assets can be transferred are crucial to a recovery, imitating a similar procedure used in Ireland.

Junk Status Looms

A possible downgradeby ratings agency Moody's is also still hanging over Spain. The agency warned in June that it could downgrade the country's sovereign credit rating to "junk" status following a review. At the end of August it decided to extend this review until the end of September, with the bank stress tests in mind.

“There are plenty more reasons why Spain should be junked," Spiro said.

Moody’s itself has warned that a 60 billion euro injection may not be sufficient for Spain's banks.

“The recapitalization amounts published by Spain are below what we estimate are needed for Spanish banks to maintain stability in our adverse and highly adverse scenarios,” it said in a statement.

“If market participants are skeptical about the stress test, negative sentiment could undercut the government’s efforts to fully restore confidence in the solvency of Spanish banks.”

Analysts at Italian investment bank Mediobanca welcomed the report but remained cautious due to the lack of details in the plans.

"We welcome fresh capital injections in Spanish banks even if 60 billion euros leaves little for positive surprises for the market, and zero detail on the bad bank is a major disappointment,” it said in a research note, adding that the latter would be needed to solve the banking crisis.

“Given these crucial uncertainties, we remain cautious on Spanish banks," they said.

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