The rating agency Moody’s anticipates a significant deterioration of credit in connection with the second wave of mergers in the Spanish financial system, a process that “will not be funded with public funds,” even though the Bank Restructuring Fund (FROB) remains in force.

“The Government has clearly expressed its intention to limit public support for banks” Says the agency considers “very unlikely” possibility that institutions receive further injections of funds in the current context of fiscal discipline.

“If that were the case, the restructured Spanish banking sector could end offering significant deterioration between the credit profiles of the entities more strong, thus weakening the credit quality of the system in general”, concludes the Agency

Recession

The substantial deterioration of economic prospects managed by the Bank of Spain, which provides for a contraction of 1.5% of GDP in 2012 and only a modest recovery of 0.2% in 2013, is also negative for the Spanish banks credit profile.

“The increasingly adverse conditions negatively issue further credit fundamentals of the Spanish banking sector,” notes the agency.

Spanish banks must also comply in June 2012 with capital requirements raised by the European Banking Authority (EBA), as well as more stringent provisioning requirements by the Bank of Spain and probably could be adopted before the end of the first quarter.

“Since the ability to generate capital through retained earnings is very limited, banks will be forced to recapitalize through leveraging or looking for external sources of capital, Which will be a challenge for a large number of entities, as capital markets remain closed for many Spanish banks, “says the agency.

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