MercoPress. South Atlantic News Agency

Spain to the rescue of banks with 9 billion Euros emergency fund

Although Spanish banks were immune to the US sub-prime contagion, they suffered their own problems with the collapse of the construction and housing industry

The Spanish government plans to set up a 9 billion Euros emergency fund to prop up the country's weakest banks if other measures fail, Finance Minister Elena Salgado said in a Sunday interview with Madrid’s ABC.

Last Friday Prime Minister Jose Luis Rodriguez Zapatero admitted that some Spanish savings banks “have problems” and said the government will back them financially and invite them to merge with healthier financial institutions.

Ms Salgado said that legislation under discussion would allow the Bank of Spain to buy controlling shares in troubled financial institutions. Spanish banks are exposed on several fronts to the collapse in domestic house-building and the ensuing recession.

The country's largest property developers have either filed for bankruptcy or swapped equity and assets for bank debt during the past 18 months. Default rates among smaller companies, mortgage-holders and consumers have also been creeping up this year.

Some estimates put the total value of property on banks' books above 25 billion Euros with the six biggest lenders alone holding residential assets worth more than 9 billion, according to their first-quarter accounts.

Bankruptcies and plummeting equity values in the property sector have already claimed one victim, a small savings and loans institution, Caja de Castilla-La Mancha.

Ms. Salgado said that under the proposed legislation, the Bank of Spain would buy a controlling stake, with voting rights, in a troubled savings bank. The 9 billion Euros fund would be financed via public borrowing and from Spain's privately-run deposit guarantee fund, which at present holds about 7.2 billion Euros.

In related news PriceWaterhouseCoopers said on Monday that Spanish financial entities could need anywhere between 25 and 70 billion Euros to re-capitalize, which is equivalent to 2 to 6% of GDP.

PWC also argues that the Spanish financial sector is over dimensioned and must undergo a process of restructuring and consolidation.

“The reduction in the indebtedness indexes for families and companies to more sustainable levels will mean a lesser credit concession in the coming years, which means the existence of an overcapacity in the range of 30%”, said PWC.