New Intraday Low For Euro As S&P Releases Bearish Report On Spanish Banking

The euro is now back to testing day lows (ignore the decoupling for the time being, total confusion reigns right now in the FX markets), not only after Meredith Whitney's very bearish remarks on the economy, but after a report by S&P that is increasing its assumption for private-sector loan losses in Spain from 4.4% to 5.5% between 2009 and 2011. Most notable is the increase in real estate loan losses by 50%, from 9.6% to 14.5%, while construction loan losses are now expected to generate 6.3% in losses compared to 5.1% before, over the same period. S&P's conclusion: "We expect to take some negative rating actions on Spanish banks as a result of these changes in assumptions." It is now time for major denials from the ECB/IMF/EC/WB/NKVD who will claim all is really wonderful.

From the report:

ASSUMPTIONS

Under our base scenario, we are assuming that systemwide cumulative credit losses on nonfinancial private-sector loans in Spain will amount to about 5.3% of the total over the 2009-2011 period, higher than the 4.4% that we originally assumed in September 2009. These figures do not, however, represent the aggregate credit losses we expect for the entire duration of the economic downturn. In particular they exclude those losses that we believe already materialized in 2008--particularly in the second half--which we estimate at 0.8% of domestic private-sector lending. According to our stress testing criteria, the base scenario is what we expect to happen during the projected economic cycle and therefore what our ratings anticipate. In general, the base case is our view of a negative scenario that has approximately a two-in-three chance of happening.

We have revised these assumptions upward after analyzing the financial system's credit performance in 2009, as well as the Bank of Spain's recent publication of data about the volume of real estate assets and size of real estate exposures classified as substandard--therefore potentially problematic--at end-2009, information that was not available when we originally made our assumptions in 2009. Our change in assumptions also takes into account Standard & Poor's forecasts for sluggish economic growth in Spain over a long period of time. (For our latest forecasts, see "Stress Scenarios: Greece, Portugal, And Spain," published June 4, 2010.)

Notably, we raised our assumptions for credit losses for real estate exposures to 14.5% for the 2009-2011 period from 9.6% previously and for construction to 6.3% from 5.1%. We have not changed our credit loss assumptions for the other asset classes (see table 1).

The table shows the cumulative credit losses that we expect on nonfinancial private-sector lending in Spain over the 2009-2011 period. It also shows the annual distribution of such losses. Note that this is only a theoretical exercise aimed at allocating losses to the year in which we forecast their occurrence. It bears little relationship to financial institutions' actual recognition of such losses for those years on their income statements given how the regulatory provisioning framework in Spain works. Since 2000, Spanish financial institutions have been required to make countercyclical provisions, and, therefore, they have already had to provision in advance some of the losses likely to arise during the downturn. In addition, regulation governs specific provisions--certain coverage levels must be met based on the number of days in arrears--which are not intended to cover solely the losses the banks expect.

To arrive at our assumptions for cumulative credit losses on domestic private-sector lending in Spain, we multiply the anticipated loss rate of each asset class by the loans outstanding for each category at end-2008. We assume that virtually all losses arise from loans outstanding at end-2008, principally those made late in the cycle. Therefore, potential future balance sheet growth or shrinkage has little impact on nominal losses.

Our credit loss assumptions are not designed to constitute a precise forecast, but rather to express a scenario in quantitative terms as part of our assessment of an institution's ability to withstand such losses. The use of stress tests helps us differentiate the credit risk profile of financial institutions within a peer group.

The assumptions are consistent with our Banking Industry Country Risk Assessment (BICRA) for Spain. Spain is in BICRA Group 3 (ranging from 1, the lowest-risk, to 10, the highest-risk). The BICRA incorporates an estimate of gross problematic assets (GPA), which we define as cumulative nonperforming loans, restructured loans, and repossessed collateral during the full course of a recession. Our GPA estimate for Spain is 10%-20% of total loans to private-sector and nonfinancial public enterprises.

Comments

[jbc77]

With algos working overtime, maniupalation in FX markets a weekly sight, when the market finally breaks it's going to be monumetally ugly. Yeah, all is well in Spain until it isn't. More of the same. Twilight Zone re-runs continue.

[LoneStarHog]

At least Mr. Serling used to tell viewers, "You Have Now Entered The Twilight Zone".

CNBS et.al. refuse to even admit that The Twilight Zone exists.

[denarii]

does anyone else think those numbers look woefully optimistic?

[GlassHammer]

A slight twist to an old saying:

"The banks in Spain go mainly down the drain."

[saraicriado@hot...]

Santander has more than 60% of his assets out of Spain, mainly in Brazil and other Latin america countries shuch as Chile, Colombia and yuhuuu UK!

[Oso]

Does ANYone have a good idea of what is actually happening with Santandar??  capital levels, loan book composition, geographical breakdowns... anything?

[Buy High Sell Low]

the only thing I know is it's going up since 10 days...but should go down

[bugs_]

Spanish Stress Test.