Economy remains main risk to Spain’s banks, EC says

While the improvement in Spain’s financial sector continues apace in the wake of the restructuring undertaken as part of a 41.3-billion-euro European bailout, the ongoing weakness of the economy remains the “main risk factor going forward,” the European Commission said Monday.

“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 banks’ holdings of government securities,” Brussels said in its fourth joint review of Spain’s compliance with the terms of the bailout.

The Eurogroup last week approved Spain’s “clean” exit from the program without the need for any further assistance or an extension of the loan of up to 100 billion euros granted in the summer of last year. The program ends in January of next year.

The review was based on the findings of an EC/European Central Bank mission that visited Madrid in the period September 16-27. It also noted that the sector remains “vulnerable” to high public and private debt levels, a rise in non-performing loans and possible future capital requirements in the wake of asset quality and stress tests to be carried out by the ECB.

The report also noted that the country’s banks have yet to pass on lower borrowings costs to customers, and attributed the lack of lending in part to the sector’s preference for acquiring Spanish government debt that pays much higher interest rates than those charged to them by the ECB for funding. Brussels said small-to-medium sized enterprises are finding it hard to obtain funding at reasonable rates.