Credit rating agency Standard and Poor’s has downgraded the ratings on 16 Spanish banks after it revised down on Friday, two steps, from ‘A’ to ‘BBB plus’, the sovereign credit rating of Spain, warning that the country could be forced to borrow more to support the banking sector, writes Reuters. The long-term and short-term credit rating of Banco Santander, the largest bank in the euro area has been downgraded from ‘A plus/A-1’ to ‘A minus/A-2’, with negative outlook. In the case of Banco Bilbao Vizcaya Argentaria, Spain’s second biggest bank, long-term and short-term credit rating were revised down from ‘A/A-1’ to ‘BBB plus/A-2’ with negative outlook. S & P also downgraded the ratings of other Spanish banks: Banco de Sabadell, Banco Ibercaja, Kutxabank, Banca Civica, Bankinter, CaixaBank and Bankia.
On April 27 the rating agency assigned Spain a negative outlook, meaning that one more downgrade could follow. Downward revision of Spain’s sovereign rating will increase the country’s borrowing costs because investors will demand higher interest rates likely to offset the higher risk caused by the rating downgrade. S & P believes that sovereign rating downgrade of Spain has a negative rating implications on banks, taking into account the Spanish government support given to the banking sector. In late May, S & P will end placing under surveillance, with negative outlook, the Spanish banking sector.
The largest banks in Spain are sufficiently capitalized and profitable to deal with a decline in economic conditions, although the group of 10 banks supported by the government is considered vulnerable, says a report published last week by the International Monetary Fund. Stress tests conducted by the IMF for about 90% of Spanish banks have shown that most banks would be able to cope with a worsening economic situation, it says in the IMF estimate on financial sector in Spain.
However, the IMF argues that a careful strategy for ‘swift and adequate cleaning’ of problem banks is essential to avoid sound banks to be affected by decreasing confidence in the banking sector.
The IMF also warns that, although the authorities in Madrid focus on solving problems in the financial sector, some banks may have difficulties in meeting the new capital regulations. Market perception of increased risk on sovereign rating and the banking sector could add further pressure on banks, especially those with higher financing needs, the IMF warns.
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