Threat of Contagion to Eurozone from Spanish Banks’ Huge Bet on Emerging Markets: UBS
Threat of Contagion to Eurozone from Spanish Banks’ Huge Bet on Emerging Markets: UBS from Wolf Street
Spanish banks expanded aggressively into Emerging Markets to flee the consequences of the euro debt crisis.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
UBS has alerted that Spanish banks’ outsized exposure to Latin American markets could serve as a source of contagion for future crises: 80% of the Eurozone’s total banking exposure to the region is channeled through Spain whose banks have around €384 billion of counterparty claims in the region.
A ‘shock’ in emerging and developing markets could also drag down the Eurozone economy, UBS said. Spanish banks’ exposure to Latin America is equivalent to around 30% of Spain’s GDP and leaves both the country and the Eurozone susceptible to contagion effects from a crisis emerging in any of the major contingent economies, the authors of the report, Themis Themistocleous and Ricardo García, warn.
This is the second time this year that UBS has warned about the health of Spanish banks. In January the Basel-based lender made waves by slashing the price targets of all Spanish lenders citing two main concerns:
- Spain’s slowing economic growth which, combined with the rising likelihood of never-ending zero interest rates in the Eurozone, could negatively impact the banks’ margins.
- Spanish banks’ low capital ratios. Most Spanish banks, including giant Santander, have capital ratios below the minimum 12% level set by the ECB. What’s more, costly litigation continues to pose a big risk to Spain’s banking sector, including the pending sentence of the European Court of Justice on the legality of Spain’s IRPH mortgage reference index which, according to Goldman Sachs analysts, could alone cost Spanish lenders between €7 billion and €44 billion depending on the outcome. With such low capital ratios, it’s not clear how the sector will be able to absorb any significant negative impact, warns UBS.
Now, UBS has thrown into the mix the contagion risk posed by Spanish banks’ huge exposure to Latin America’s fragile economies. It’s not the only one who’s raised concerns about this risk.
At the end of 2017 the IMF warned in an assessment of Spain’s financial sector that the significant international presence of the country’s biggest banks, while providing welcome diversification effects, may also have significant implications for inward and outward spillovers:
The share of financial assets abroad has grown continuously for the Spanish banking sector, with the largest international exposures by financial assets concentrated in the United Kingdom, the United States, Brazil, Mexico, Turkey and Chile.
Most worrisome of all is Spain’s banking exposure to Latin America’s two mega-economies, Brazil and Mexico. In Brazil, Spanish banks had total exposure to the economy of $150 billion in the third quarter of 2018, down slightly from $161 billion in the first quarter, according to BIS data. It’s still the equivalent of 47% of total foreign banking investments in the country.