No plans to inject more cash into Spanish banking system

Madrid requested euro zone assistance in June last year, with its banks the immediate concern. It was granted up to 100 billion euros to help recapitalise the most troubled lenders and has drawn 41.3 billion euros (35.4 billion pounds). “There is at present no reason to foresee further programme disbursements,“ the Commission said in its third review of the aid programme. “The rest of the Spanish banks either were not diagnosed with a capital shortfall in the stress test or were able to cover it by private means.” The euro zone's fourth biggest economy suffers from record high unemployment of nearly 27 percent and has been either in or close to recession for the past five years, which has greatly limited the government's room for manoeuvre.

In recent months there has been some improvement in the macroeconomic picture, with net exports in particular growing, which has helped narrow the current account deficit. “The positive trends in the stabilisation of the Spanish financial sector need to be maintained and the close monitoring thereof should continue,“ the Commission said.

The report concluded that the banking sector was now more stable, but that the profitability of banks remained a significant challenge given low growth and interest rates. “A prolongation of the negative trends in unemployment, real incomes and solvency of companies beyond current expectations will heighten risks, particularly for weaker banks,“ it said.

The banking sector could also face further fallout from problems in the housing market.
Spain's once high-flying property sector seen prices fallen by up to 30 percent. But economists believe they may have to drop a further 20 percent before they have touch bottom. That means more bad property loans will have to fall due, with a knock-on impact on banks and mortgage lenders. “Against the difficult macroeconomic setting projected for 2013, non-performing loans are expected to increase further both for households and corporates,“ the review said.

At the same time, the broader economic and fiscal picture remains uncertain. The economy is still contracting and the deficit rose to 10.6 percent of GDP in 2012. Government debt rose to 84 percent of GDP, from 69 percent in 2011.

The Commission recommended Madrid, which has pledged to cut its deficit below the EU's limit of 3 percent of GDP by 2016, to continue a gradual budget correction while accelerating implementation of labour market and public sector reforms.