The International Monetary Fund (IMF) has said today that Spanish banks will need 22 billion euros to cover the loss of value of assets if the crisis worsens, and predicts that bad debt will continue to rise. In a study conducted in collaboration with the Bank of Spain, the IMF predicted that non-performing loans and the recovery of property for nonpayment will continue to rise, which will weigh heavily on the balance sheets.
According to the IMF, 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.
Since the fall in house prices and the recession have been more dramatic in Spain than in the rest of the Euro zone, some analysts have questioned whether the financial sector has sufficient reserves to withstand the blow, despite the fact that Spanish banks entered the crisis with higher reserves than in other countries.
The IMF has tried to provide an answer in its "Global Financial Stability Report, released today, which devoted a section to Spain. The IMF first analysed the situation of Spanish banks, assuming that economic forecasts are met and the crisis slows down.
In this case, 6.3% of bank loans will be in arrears in the third quarter of this year (6% in the case of savings banks), but from there the situation will improve and by the end 2011, the bad debt will have fallen to 5.1% and 5% respectively.
If this is the case, the loss of asset value would be 1 billion in the case of banks, whilst savings banks would lose 6 billion, because their incomes are lower and they have 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.