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Moody’s says Spain banking outlook “negative”

Credit rating agency Moody’s issued a negative outlook on Spain’s banks Monday and warned that total economic losses could reach 176 billion euros.

New York-based Moody’s Investors Service said it was maintaining a negative view for the next 12-18 months because it expected Spanish banks’ capital, profits and access to finance to remain weak.

The verdict comes as Spain battles to convince nervous markets that its finances are solid and there is no reason to fear it will need an Irish-style economic and banking rescue.

Finance Minister Elena Salgado rejected the findings.

“I trust and I am absolutely sure in the soundness of the Spanish financial system,” she told reporters.

Salgado said European Union banking stress tests conducted in July, which found five regional banks were vulnerable, were rigorous. Markets have cast doubt on the tests, which gave a pass to the now crisis-hit Allied Irish Banks and Bank of Ireland.

Moody’s blamed banking weakness on Spain’s economic woes, deteriorating asset quality and the government’s cost-cutting drive, which would mean no quick relief for a near 20-percent jobless rate.

“Moody’s expects corporate profits to remain depressed for some time, especially in view of the limited likelihood of an additional economic stimulus, adding strain on unemployment and contributing to further deterioration in loan quality,” said the report’s author, Moody’s senior analyst Alberto Postigo.

The agency said it expected economic lifetime losses for Spanish banks of up to 176 billion euros (233 billion dollars), of which the banks had so far only recognised 88 billion euros through write-downs and reserves.

After taking into account funds committed by the government and other offsets, Moody’s estimated there was still a net capital short-fall of 17 billion euros.

Banks were unlikely to be able earn enough to compensate for the gap, Postigo said, forcing some to seek funds elsewhere, possibly via the government-backed Fund for Orderly Bank Restructuring (FROB).

Banks needed higher ratios of capital, such as stocks, as a proportion of overall assets so as to restore market confidence, he said.

Spain’s banks had good retail franchises that would help them over the longer term, Moody’s said.

“However, a necessary prerequisite for achieving stability in Spain’s banking system is an acceleration in the pace of consolidation within the system, which entails a realization of losses and recapitalizations,” Postigo said.

“Additionally, balance sheets need to be cleansed of troubled assets, thus preventing a prolonged drag on the banks’ performance,” he said.

In early afternoon trade, Number-one bank Banco Santander rose 0.48 percent and BBVA climbed 0.56 percent and Banco Popular declined 0.57 percent but Banco Sabadell eased 0.25 percent.

Spain at the start of 2010 emerged from a 12-month recession, brought on by the global finance crisis and the collapse of the country’s housing market, where banks had been heavily exposed.

Continued weak growth this year — momentum was stagnant in the third quarter — and the country’s large public deficit have unsettled financial markets, which have not been entirely reassured by the Socialist government’s austerity measures.