Spain: Solvent with risks

- "Spain has been a key focus of investor attention during the past few months. While its sovereign debt dynamics are somewhat challenging, the involvement of its banking system in the real estate sector has been the key source of uncertainty. Because of its size relative to other countries under investor scrutiny, the fate of Spain to a large extent may determine that of the euro area."
- "The Spanish banking sector is heavily exposed to the construction and developers sector (EUR445bn or 25% of total loans). We project losses net of provisions, profits and recoveries of about EUR46bn (ie, about 4.4% of GDP). The risks of bank exposures to residential real estate are limited, as LTV ratios for residential mortgages are moderate, household affordability levels remain contained, and provisions coverage and estimated recovery rates on collateral would be able to absorb expected losses."
- "Adding the quasi-fiscal costs for bank recapitalisation and other conservative assumptions (including lacklustre growth), the government needs a primary balance adjustment of about 12% of GDP over the next five years to stabilise the public debt-to-GDP ratio at around 80%. The government fiscal plan to cut the overall deficit to 6% of GDP by 2011 and to 3% by 2013 could be consistent with a sustainable debt path if the plan is extended beyond 2013."
- "While in principle Spain and its banking system are solvent, there is a series of key risks. First, any changes in ECB liquidity policy could put Spanish banks in a difficult position as, for the time being, they are heavily dependent on it. Second, by October a new budget will be presented by the government. Lack of support could precipitate a government crisis. Third, failure to implement the pension reform currently under discussion would cast solvency doubts."
- "Overall we do not want to downplay these implementation risks. Spain is certainly vulnerable to them as well as to an increase in global risk aversion. But at the same time, these risks are known and followed closely. Current problems are challenging but still manageable, in our view."
Barclays Economics Research 20100707

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