Credit defaults hit new record highs in August

The deepening recession accompanied by sky-high unemployment continued to take its toll on the balance sheets of Spain’s banks as non-performing loans hit yet new record levels in August.

According to figures released Thursday by the Bank of Spain, the default ratio in August hit 10.5 percent of total lending. The ratio has now risen for 17 months in a row largely as a result of the bank’s exposure to the real estate sector, which went belly up at the start of 2008 after a decade-long boom.

In absolute terms, the volume of non-performing loans rose from 127.785 billion euros a year earlier to 178.597 billion in August, out of a total loan portfolio of 1.69 trillion.

The previous record non-performing ratio was registered in February 1994, during a previous crisis when it hit 9.15 percent. That figure was surpassed in June of this year.

The rise in defaults may be due to banks reclassifying loans

Spain has slipped back into recession for the second time in three years. The government expects the economy to contract 1.5 percent this year and 0.5 percent in 2013. However, the IMF estimates output will shrink 1.3 percent next year.

Analysts said another reason behind the pick-up in defaults in the past few months may be the decision by banks to classify refinanced loans as non-performing ahead of the establishment of a bad bank to absorb the toxic assets of lenders.

The Bank of Spain this month issued a circular to the country’s lenders urging them to tighten their classification of non-performing loans.

Europe has granted Spain a loan of up to 100 billion euros to recapitalize the banking system. Independent consultant Oliver Wyman has estimated the sector needs 53.745 billion euros in capital to weather an adverse scenario in which the domestic economy contracts a combined 6.5 percent through to 2014. Most of the funding is required by banks that have been nationalized, including Bankia-Banco Financiero y de Ahorros, which needs 24.743 billion euros.