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Spanish Stress Tested

Following last night’s announcement of Spain’s 2013 budget an independent stress test is being conducted to assess the size of the hole in the nation’s banking system.

Yesterday Spain pledged to meet its deficit target of 4.5 per cent of economic output and laid out the government’s plans to freeze public wages, cut ministry spending and bring an end to tax lottery winnings and tax rebates on mortgages. The Euro, which has taken a series of knocks in the last few days, experienced a rebound following the announcement as the likelihood of struggling Spain seeking a bailout grew.

Today’s test, which weighs up the damage incurred by the property crash, is a condition of the banking bailout agreed in July and worth 100 billion Euro’s to the nation. Oliver Wyman will conduct the test on 14 banking groups prior to the creation of a ‘bad bank’ (which will be used by floundering lenders to hold soured real estate).

Although Economy Minister Luis de Guindos recently estimated the capital needs of banks involved in the stress test to be similar to the previous estimate of 60 billion Euro’s some analysts are unconvinced that today’s announcement will remove the fear of weakness in some lenders.

An analyst with Madrid based Nomura International stated: ‘There’s no right answer for how much capital the Spanish banks will need but they at least need to exceed people’s expectations.’ Daragh Quinn continued: ‘The real experience of the banks shows that losses just go up to the extent that the economy gets progressively worse.’

If the German Parliament is to approve Spain’s bailout the latter nation needs to prove that it’s serious about repairing the banking system. As asserted by chief economist Holger Schmieding: ‘Whatever the number is that comes out of the stress tests, there will always be people in the markets that question it. What really counts is that Merkel can have the arguments she needs to go before her Parliament to ask for money for Spain.’

The results from the stress test won’t be released until after the market closes in Madrid.



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