Fitch Says Spain's Banks May Require Another Bailout

Fitch Ratings believes that Spain's Memorandum of Understanding (MOU) on the bank recapitalization plan represents a far reaching reform of the Spanish banking sector. However, the ratings agency warns that it may not be the last such bailout for the troubled financial sector.

Fitch writes: "While the MOU is clearly intended to be the final reform of the Spanish banking sector, Fitch is cautious about whether this will actually be the case, given the very tough economic and market conditions in Spain," says Maria Jose Lockerbie, Managing Director in Fitch's Financial Institutions group.

Spain has been granted financial assistance from European leaders in amounts up to $125 billion. The loan will come from the European Financial Stability Facility (EFSF), the temporary bailout fund, and will add debt to Spain's troubled finances. Spain's 14 largest banks, representing 90 percent of banking assets, are being stress-tested to see how much capital each one needs. Banks will be divided into different groups at that stage and will receive capital based on certain variables.

Owners of Spanish bonds will be the losers in these bailouts, writes Fitch. Burden-sharing will be implemented on subordinated debt and preferred shareholders through principle write-downs. Burden-sharings was part of other bailouts, however it only amounted to freezes of dividends or interest payments.

Fitch also states that further conditions of the bailout recapitalizations for banks include higher capital requirements, re-assessment of loan-loss provisions, changes in corporate governance, strengthening of supervisory framework, consumer protection (for savings), and oversight of the financial safety net agencies.

Spanish government bond yields rose in Madrid trading on the report. Spanish 10-year bond yields rose 6 basis points to 6.906 percent after a reaching a day's high of 6.924 percent but remained below the dreaded 7 percent level. Also, Spanish 2-year bond yields rose 14.4 basis points to 4.18 percent and remained above the dreaded 4 percent level for the second consecutive day. Spain's Ibex 35 Index, its benchmark stock index, fell 0.74 percent on the report.