Spain savings banks must do more to gain trust -PM

 

Spain's savings banks must do more to improve their credibility and solvency, Prime Minister Jose Luis Rodriguez Zapatero said on Thursday as Madrid battles to convince financial markets it will not need to be bailed out next year.

Zapatero said Spain will concentrate on structural reforms in 2011 after a month that has seen its debt yields soar and the country move to the eye of the storm in Europe's debt crisis as investors worry over its stalled economy, banks and debt. "We will dedicate a great part of policy in 2011 to structural reforms", Zapatero told a news conference.

"2010 has been a difficult year, but we have thorough reforms to get started, some immediately, to guarantee economic recovery and employment."

Spain's economy barely crawled out of a year-and-a-half of recession this year while markets have focused on the massive public deficit and the strength of a banking system badly hit by the collapse of the property sector.

This year, the Socialists have pushed through a key labour law reform in response to an unemployment rate that is more than double the EU average and will attempt to overhaul the pension system and extend service sector reforms in 2011.

Zapatero said the restructuring of the savings bank sector, which has cut the number of unlisted banks to 17 from 45, had been completed but must be extended to strengthen their capital base and improve credibility.

"The restructuring process has been completed but is not over and the savings banks must improve their transparency and strengthen their capital," he said.

Madrid passed a slew of spending cuts in 2010, including wage reductions, frozen welfare and cancelled investments, to convince investors they have control of their finances and are not heading down the same road as Ireland and Greece.

Expectations the government will be forced to apply for EU/IMF aid has pushed up the premium demanded by investors to hold Spanish over German debt to euro lifetime highs of over 300 basis points from below 70 bps before the crisis began.

Aside from the banks, investors' other big doubt is whether Madrid will be able to get growth going strongly again in an economy whose pre-financial crisis boom was based largely on property and cheap consumer borrowing.

The economy would grow in the fourth quarter after stagnating in the June to September period and would meet its deficit targets both this year and next, the prime minister said.

The government expects gross domestic product to shrink 0.3 percent in 2010 before growing 1.3 % next year. Spain aims to deflate its public deficit from 11.1 % of GDP in 2009 to 9.3 % this year and 6 % of GDP in 2011.

Zapatero will present a full analysis of the economy over 2010 and the government's outlook for 2011 Jan. 11