MercoPress. South Atlantic News Agency

Spain expected to announce strong support for the ailing banking system

Rajoy must helps banks saddled 175bn Euros in ‘problematic holdings’

Spain's prime minister says the government will likely present this week new measures to help banks, a key source of worry over whether the country might need a financial bailout.

Mariano Rajoy gave no details but said he would not rule out lending or injecting government money into the sector if necessary.

“The last thing I would do would be to inject or lend public money but if it is necessary I would not hesitate to do it, just as other European countries have done,” Rajoy told Onda Cero radio in an interview.

He said the measures would almost certainly be presented after Friday's weekly cabinet meeting.

Spain's real estate bubble burst in 2008, saddling banks with enormous amounts of bad loans as unemployment rose and people could not pay their mortgages. The Bank of Spain says the sector has about 175 billion Euros in “problematic” holdings.

The government was preparing to help out troubled lender Bankia SA, Spain's fourth biggest bank, according to El Pais newspaper. Bankia is considered to be among the worst hit by the real estate collapse, with more than 30 billion euros in toxic assets.

Hours after Rajoy spoke, Bankia president Rodrigo Rato, a former managing director for the International Monetary Fund from 2004 to 2007, announced his resignation. He said he finished his task of restructuring the bank.

A former conservative economy minister for Spain, Rato took over leading savings bank Caja Madrid in 2010 and oversaw its merger with six other entities to form Bankia last year. The group's restructuring brought about the closure of 800 bank offices and major layoffs.

The government has forced banks to strengthen their finances by merging and setting aside some 50 billion Euros more in provisions this year to cover toxic assets.

The Economy Ministry last week said Spanish banks were studying the creation of a separate entity - a “bad bank” - to take on these assets, such as failed loans on property.

Spain is at the centre of Europe's debt crisis, with investors concerned about its ability to push through austerity measures and reforms at a time of recession and with unemployment above 24%.

Measures are aimed chiefly at slashing the government's deficit from 8.5% of GDP to below the maximum level set by the EU of 3% by 2013. For this year, the goal is 5.3%.