New bailout fears as Spanish banks fail stress test

Ratings agency Moody’s has revealed that Spain’s banks face a capital shortfall that is almost double the amount reported by the Spanish government last week.

In order to cope with mounting losses and maintain capital ratios that are above the thresholds outlined in legislation last year, Moody’s Investors Service estimates that the nation’s lenders require a fresh injection of between €70 billion and €105 billion.

The publication of Moody’s report casts serious doubt on the credibility of the stress tests commissioned by Spanish officials which found a shortfall of €53.7 billion. It also raises the prospect of further downgrades and bailouts as fears grow about the solvency of Spanish banks and their ability to withstand further losses from the collapse in property prices.

The stress test, which reviewed 14 lenders, was required under the terms of the current €100 billion bank bailout, and was designed to show that Spanish officials are getting to grips with their debt problems. However, there is now increasing speculation that Moody’s will downgrade Spain’s credit rating from Baa3, the lowest investment-level grade, to junk status.

Such a downgrade would likely send Spanish 10-year bond yields (currently 5.88%) back into the danger zone, raising the prospect that the nation will seek a further bailout from the other members of the Eurozone.

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