Spain’s banks last week reported record high bad loans in August, revealing persistent balance-sheet weakness despite a eurozone-funded bailout. Bad loans rose from the previous month by 2.0 billion euros ($2.7-billion), or 1.13 percent, to an unprecedented 180.7-billion euros ($247-billion). That represented 12.12 percent of all credit extended by Spain’s banks, up from 11.97 percent in the previous month. Bad loans in Spain, mostly linked to the collapsed property sector, have now hit a record high for three straight months.
Spanish bond spreads and bond yileds have moved in the opposite direction. The soaring non-performing bad loans should perhaps have prompted a bit of bond selling (resulting in higher yields). But instead, the higer the level of bad loans the better the credit quality and falling yields.
“Spanish banks will need to put aside extra provisions of up to €10bn to cover loans that borrowers will struggle to repay, according to an internal estimate by the Bank of Spain. The Bank of Spain believes that the risks emanating from this practice, known as “extend and pretend”, have not been fully covered and is pressing all banks to reclassify their refinanced loans according to tighter standards by the end of September. The new regime will make it harder for banks to treat refinanced loans as if they were performing normally, in turn forcing lenders to take additional provisions.” (FT)
And least 97% of the social security pension fund, is invested in Spanish government bonds. The Fondo de Reserva de la Seguridad Social in 2012 increased its domestic sovereign debt holdings to 97 percent of its assets from 90 percent at the end of 2011 (Bloomberg).