Spanish Banks Downgraded

Fitch cuts Greece on default fears; G8 will discuss strategies

A bull ring in the Spanish capital, Madrid. A bull ring in the Spanish capital, Madrid.

Moody’s cut the ratings of 16 Spanish banks, taking Banco Santander and Banco Bilbao Vizcaya Argentaria down three notches each. Fitch, meanwhile, dropped Greece into its lowest level in junk territory on concerns that Athens might default on its massive debt. And G8 leaders were set to meet at Camp David for discussions on how to avert financial disaster in Europe.

Bloomberg reported Friday that Moody’s took the action on Thursday citing recession and growing loan losses. The ratings agency cut nine banks by three notches each, and seven were kept on review for possible additional cuts. Other reasons Moody’s gave for the new ratings included restricted funding access and the Spanish government’s lesser capacity to maintain the country’s lenders because of its own credit issues.

Spain has been in for considerable bad banking news during the month; on May 9 it nationalized Bankia, and concerns over repercussions from that were added to by the Moody’s action. In a statement, the ratings agency said, “Banks will continue to face highly adverse operating and market funding conditions that pose a threat to their creditworthiness. The Spanish economy has fallen back into recession in first-quarter 2012, and Moody’s does not expect conditions to improve” this year.

On Feb. 13, Moody’s cut Spain’s sovereign debt rating, and on May 14 it dropped the ratings of 26 Italian banks. It has not been alone in its re-evaluations; Fitch Ratings lowered Greece’s credit rating on Thursday to CCC from B- over fears that recent election results predict an inability of the country to keep its bailout promises. The euro fell on the downgrade reports, and in early morning trading continued its slide.

On May 11, Spain announced that its banks, which carry 184 billion euros ($234 billion) of what the Bank of Spain characterizes as “problematic” real estate-linked assets, must reserve about 30 billion euros against possible losses on still-performing real estate loans. That is in addition to 53.8 billion euros of charges and capital ordered in February. According to Economy Minister Luis de Guindos, the government will hire two auditors to value lenders’ assets.

Greece’s banks have been bleeding deposits over fears that the country will depart the euro and return to the drachma with a corresponding loss of savings. Spain’s Deputy Economy Minister Fernando Jimenez Latorre denied an El Mundo report on Thursday that deposits were leaking from Bankia; according to the newspaper, 1.3 billion euros had been withdrawn by customers since May 9. The new Bankia chairman, Jose Ignacio Goirigolzarri, said Thursday that the bank’s last several days of activity had been “basically normal.”

However, in a UPI report, Bankia told Spain’s National Securities Commission that withdrawals made during the past two weeks were of a “substantially seasonal nature.” It also said that it was confident that remaining deposits would not go through “substantial changes” during the coming few days.

G8 leaders planned to address the financial crisis at a weekend meeting at Camp David with President Obama, and although no policy decisions are expected to emerge from the gathering, growth is expected to be a major topic, with both President Obama and the new French president, Francois Hollande, expected to advocate for pro-growth policies.

Reuters reported that, in a move rich with symbolism, Hollande’s new government began work on Thursday by cutting its own pay and that of Hollande himself by 30%, with the action affecting all 34 ministers just a day after Germany’s cabinet gave itself and Chancellor Angela Merkel a 5.7% pay increase.

The vote took place as France’s new finance minister, Pierre Muscovici, called again for euro zone political leaders to rework the fiscal treaty they had agreed to in March so that it incorporates pro-growth measures as well as deficit reduction requirements. "What we've said is the treaty will not be ratified as it stands," Moscovici said in the report. "We're firm on this."

Hollande also instituted new guidelines for cabinet ministers that included requirements to abjure expensive gifts, cut down on travel expenses, lead by example and avoid conflicts of interest. Anxious to distinguish between his administration and that of former President Nicolas Sarkozy, whose flashy image included a taste for costly travel, Hollande chose to ride in a hybrid Citroen to his inauguration rather than something grander.

At the heart of the euro zone crisis, meanwhile, Greece awaits new elections under a caretaker government. Still, there is no lack of continuing drama. Alexis Tsipras, head of the Syriza party that advocates rejection of Greece’s second bailout, said in a Wall Street Journal interview that Europe would be foolish to cut off funding to Greece. However, if it takes that action, he added, Greece will repudiate its debts.

"Our first choice is to convince our European partners that, in their own interest, financing must not be stopped," Tsipras said. He continued, "If we can't convince them—because we don't have the intention to take unilateral action—but if they proceed with unilateral action on their side, in other words they cut off our funding, then we will be forced to stop paying our creditors, to go to a suspension in payments to our creditors."

Although Tsipras is not opposed to Greece remaining in the euro zone—just to the tough terms of the bailout—he accused pro-euro politicians of trying to frighten voters into buying into additional austerity measures in the wake of election results that were a firm rejection of them. He pointed out, "Whatever we do, things will be difficult," adding, "But it will also be difficult at the same time for all of Europe because the euro will collapse" if Greece's funding is cut off.

“[B]efore we reach that point,” he said, all sides need to work together to find a “European solution.”

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