Bank of Spain challenges Moody’s estimate of banking problems

Spain’s sovereign debt rating has been downgraded by Moody’s even though Madrid insists that Spanish banks do not need enormous sums to become sufficiently solvent and meet strict new capital requirements.

The ratings agency said that it cut Spain’s rating – to Aa2 from Aa1 – because it believed restructuring of the country’s savings banks would cost much more than the Madrid government has calculated.

But hours after the downgrade, Spain’s central bank came up with a new estimate of how much additional money its banking sector will need.

It said only 15.5 billion euros – not the 20 billion it calculated before – could be needed to recapitalise weak lenders, mostly savings banks – known as cajas.

Moody’s has said it believes the overall cost is likely to be nearer 40 to 50 billion euros and in a worst case scenario recapitalisation needs could even rise to around 110-120 billion. Another agency Fitch said 38 billion, at least, and perhaps as much as 96.7 billion.

The Moody’s downgrade – which Spain’s Treasury Director said was a “surprise” – boosted the amount of interest Madrid has to offer investors to get them to buy Spanish government bonds.

The Bank of Spain named 12 lenders who will have to clean up their balance sheets, including Barclays and Deutsche Bank’s Spanish divisions.

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