Spain’s Banks Facing Challenges

Today, Standard & Poor’s (S&P) added Spain’s AAA bond rating to CreditWatch Negative due to economic weakness, confirming our view that Spain is facing significant challenges in the months ahead. Industrial output declined 15.1% year over year in November - the biggest fall on record - and 5.8% through the first 11 months of 2008. Spain has been particularly hard hit due to its reliance on construction - particularly in housing - and credit as the driving forces of the economy for last 14 years, both of which are now slumping.

Spain also reported a steep rise in the unemployment rate to 12.8% in November, a 12-year high, and the highest rate in the European Union. Some economists believe that the unemployment rate could reach as high as 20% in 2010 as the economic slowdown gains momentum.

This grim outlook supports our negative view of banking in Spain. Loan impairment charges are likely to rise as banks come to grips with the effects of a falling economy and its impact on the housing sector, especially for loans to builders and developers, which generally account for roughly 40% of property loans. We currently have Sells on Banco Bilbao Vizcaya Argentaria, S.A. (BBV) and Banco Santander Central Hispano, S.A. (STD).

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