Spain says banks may need more capital

Spain's banks may need more capital if the economy deteriorates, the head of the central bank said on Tuesday, reflecting fresh concerns that some might not survive a recession made worse by the government's austerity drive. Spanish lenders were bruised by the 2008 property crash and have been under scrutiny since the euro zone debt crisis deepened last year. But a recent surge in loan defaults in other sectors has put them back under the spotlight again. Investors are worried the banking troubles may force Spain to take a bailout like Greece and neighboring Portugal and sold Spanish bonds on Tuesday, sending yields up to levels not seen since December. The government has ruled out a bailout and Prime Minister Mariano Rajoy announced new spending cuts on Monday in a bid to meet a stringent European Union deficit limit. The EU welcomed the savings but many analysts fear they will lead to a deeper recession, a scenario that Central Bank Governor Miguel Angel Fernandez Ordonez said could mean banks will need more capital. "If the Spanish economy finally recovers, what has been done will be enough, but if the economy worsens more than expected, it will be necessary to continue increasing and improving capital as necessary in order to have solid entities," he said at a conference in Madrid. The economy is forecast to contract by 1.7 percent this year but is likely to deteriorate further as the government slashes 27 billion euros from the central budget, and billions more from spending in the country's 17 autonomous regions. Ordonez said it was unlikely the country would experience a strong recovery in the short-term. "The solutions to the crisis, which came from excessive debt or loss of competitiveness, are very slow within a monetary union and that is why we can't afford to become complacent," he said. The latest banking reform, introduced two months ago, urged banks to put aside around 50 billion euros of provisions to mop up real estate losses and encouraged mergers and costs savings without dipping into state funds. The government says it will not need to inject more state aid into its banks, but many analysts are skeptical that simply forcing weaker rivals into the arms of more solvent players will be enough to fill funding gaps.

Posted in: Spain says banks may need more capital