Spain will initiate reforms of its savings banks

Spanish PM Jose Luis Rodriguez Zapatero

Spanish PM Jose Luis Rodriguez Zapatero

The Spanish government – in an attempt to boost the confidence of the international community in its financial system, will initiate a recapitalization process of the country’s beleaguered savings banks or cajas, after facing pressure from France and Germany.

The move is being backed by the country’s Prime Minister José Luis Rodríguez Zapatero – who has termed it as the second round of capitalization for the unlisted cajas. In an interview to the Financial Times, Mr. Zapatero said that bank recapitalization process is the most ambitious reforms step undertaken in Spain over the last 20 years and will have the most lasting effect.

The Spanish banking industry is on a shaky ground despite the recent success of Portugal and Spain’s bond auction. The investor confidence is low for the country’s banking industry and weaker banks and cajas are still unable to raise long term capital from the country’s financial markets.

Criticizing the late move, one Spanish baker said “Until today, the authorities have always said that the banking system was fine. Finally they are acknowledging that the problem is there and they are working on a way to solve it”.

The investor’s have temporarily shifted their focus from the Spanish budget deficit – which is improving, to the debts of the banks that the country has assumed for being the guarantors of the banking system, and Mr. Zapatero is aware of this fact.

“We have to finish off the restructuring process, so that there will not be the shadow of a doubt over the sovereign creditworthiness in the system”, the Prime Minister said.

Spain has already allocated €15 billion ($20 billion) for broadening the capital bases of cajas; however, analysts estimate that another €20-€120 billion will be required to stabilise the system.

Latest estimates by Barclays show that Spain will require another €32-78 billion to stabilise the banking system. The amount represents 3-8 of Spanish GDP and can potentially widen the country’s fiscal deficit.

Though it’s not clear how the fresh capital infusion will be done, some economist say it may be in the form of ‘Fund for Orderly Bank Restructuring’ or FROB, under which the fund acquires equity stake to pump more capital to the bank rather than continuing with credit support. Banker’s in Madrid termed this as ‘partial nationalization’ and explained that the FROB later sells the equity to either domestic or foreign institutional investors.

Mr. Zapatero said he hopes that private investors will respond to the government’s recapitalization and accepted that the government may have to step in to fund the banks.

“We’re absolutely convinced that the restructuring of the Spanish financial system can be done by strengthening the system with private capital, and perhaps with very limited recourse to public capital”, admitted Mr. Zapatero.

In a move to boost investor confidence, the Spanish central bank has asked the cajas – whose number has reduced to 17 from 45 due to mandatory mergers aiming at consolidation, to disclose their exposure in the property market in detail.

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