In an effort to save the weakest savings banks from collapsing, the Spanish government may buy partial stakes in them as it struggles to assure the international community that acquiring partial stakes will not further exacerbate its faltering economy.
Sources say that the government may force highly leveraged regional banks to become conventional banks and list in stock exchanges to raise fresh capital.
The state backed ‘Fund for Orderly Bank Restructuring’ (FROB) will then acquire stakes in those banks which fail to attract private investments.
FROB has been acting as the lender for the savings banks or cajas – as they are locally known. High levels of loans on the cajas’ balance sheet is threatening to destabilize the Spanish economy – which is already struggling with a high budget deficit, triggering fears that it may require Greece or Ireland style rescue packages.
However, the government’s latest effort to bring in much needed transparency has been welcomed. “I think it’s encouraging. One of the root causes of the lack of confidence in the euro area is the fear that Spain is the next Ireland”, said Ken Wattret – Chief Eurozone Economist at BNP Paribas.
Analysts believe Spain may require between €17 billion and €120 billion to recapitalize its banks though Spanish Economy Minister Elena Salgado puts the estimate at much lower level.
Rating agency Fitch said in a statement on Friday that if cleaning up the banks’ balance sheet costs between €50- €60 billion and the government has a credible plan in place, then “that’s a net positive”.
Economists believe that Spain can afford that kind of money to recapitalize the regional lenders even if private investors stay away from them, without any external help – which in turn will take the pressure off the European Financial Stability Facility (EFSF), the eurozone rescue fund. Even then, the current size of EFSF may not be sufficient to support Spain’s debt obligations due to mature in 2013.
The Spanish government has already forced the savings banks to merge in an effort to consolidate their operations, thus reducing their numbers to 17 from 45. The banks are also required to disclose their exposure in the real estate sector in more detail by January 31.