Spanish economy weighs on banks

Spain’s economy is weighing on Spanish banks and is the “main risk factor” as lending shrinks and real estate prices fall, the EU says.

“Lending to the real economy is still contracting at a rapid pace against the backdrop of weak solvent demand for new lending and a large increase in the banks’ holdings of government securities,” the European Commission said yesterday in its fourth review of Spain’s compliance with terms of a banking industry bailout.

The government needs to keep pressing for changes, and the banks should continue to improve their solvency to underpin lending, the report said.

Spain took €41.3bn in European aid last year as real estate-linked losses at former savings banks like the Bankia group threatened government finances. Rising bad loans and shrinking lending at Spanish banks show they still face challenges to profitability after a property crash that saw the industry take €87bn of impairment charges last year.

The report, after a joint European Commission and ECB team visited Madrid in September, said that Spain’s compliance with the programme, together with government changes designed to enhance growth, was accompanied by a return of investor confidence.

Shares in Spanish lender Banco Popular Espanol have jumped almost 80% since the end of June.

Spain needs to continue efforts to make the economy run more efficiently “to reap fully the expected positive growth and competitiveness effects from the reforms,” the report said, noting there are still risks to the government meeting its 2013 deficit target.

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