MADRID: Spain's banks may need to boost their capital further if the economy deteriorates more than expected this year, Bank of Spain Governor Miguel Angel Fernandez Ordonez said Tuesday.
"If the Spanish economy deteriorates more than expected, it will be necessary to continue to boost and improve capital levels as much as is needed to ensure we continue to have solid institutions," Ordonez said.
"It is unlikely that we will see in the short term a strong rebound of the Spanish economy," he added at a banking conference in Madrid.
Spain is heading back into recession this year with the government predicting the economy will shrink 1.7 percent after expanding 0.7 percent in 2011 as the country continues to reel from the collapse of a property boom in 2008.
But that prediction appears optimistic to some analysts. Citigroup forecasts the economy will contract 2.7 percent in 2012, trailing only bailed-out Portugal and Greece in the eurozone.
The bank predicts that 2013 will not be much better, with the economy, the eurozone's fourth-largest, falling an additional 1.2 percent. The Spanish banking sector has already set aside 112 billion euros ($145.5 billion) in provisions between the end of 2007 and the end of 2011, Ordonez said.
Prime Minister Mariano Rajoy's conservative government, in power since December, approved new rules in February obliging banks to boost provisions for bad loans by 50 billion euros.
In addition to the stock of bad loans at risk of never being repaid, banks are also saddled with seized buildings and other real estate assets whose value has plunged.
Spanish banks had 176 billion euros in "problem" assets as of June 2011, according to the Bank of Spain, and the amount is likely to have grown.
Updated figures on problem assets are due for release in later this month.