Spanish banks would need 59.3 billion euros ($76.3 billion) to maintain healthy capital levels in a worst-case economic scenario, according to the results of stress tests released Friday.
Consulting group Oliver Wyman conducted the tests on 14 of Spain’s largest lenders, concluding that seven of the banks would need capital infusions if Spain’s economy was to severely contract in the next three years.
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The seven other banks, including Banco Santander, Banco Bilbao Vizcaya Argentaria and Caixabank, don’t need capital infusions, the results found.
Spain is deeply in debt to foreign creditors and its ability to borrow has been severely hampered by rising interest rates caused by doubts over Spain's solvency. The Spanish government authorized the stress tests in an effort to convince European fiscal leaders and potential lenders that serious financial reform is in the works.
In June, Eurozone leaders agreed to a 100 billion euro line of credit for Spain. The stress tests were conducted to determine how much of that credit line the banks would need in an emergency.
The stress tests assessed capital needs for the banks should Spain’s economy contract by 6.5% between 2012 and 2014.
The Dow Jones Industrial average recovered some losses following the release of the better-than-expected results. The Dow was recently down 50 points, off session lows.
In a press release, the consulting group that oversaw the tests said, “The capital needs identified are the result of a very extensive and detailed analysis of the value of credit portfolios and foreclosed assets, and of the capacity of the banks to absorb losses over the next three years under a very adverse scenario.”
As had been widely predicted, three banks nationalized by the Spanish government in the past year as the country’s debt crisis has magnified were cited as having the largest capital shortfalls. They are Bankia SA, which needs 24.74 billion euros; Novagalicia Banco, which needs 7.18 billion euros; and Catalunya Bank, which needs 10.83 billion euros, according to the report.
The report said these banks are already working with Spanish and European fiscal leaders on restructuring plans.
Spain is one of several European countries struggling under the weight of burdensome debt, stagnant growth and unsustainable government spending levels. Greece, Portugal and Italy have also struggled to meet debt payments as government costs, including pensions and other employee benefits, have escalated in recent years.
On Thursday Spain’s government said it would pass 43 new laws in the next six months, all designed to scale back government spending and ease the country's debt burden.
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