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Spain's Fund for the Orderly Restructuring of Banks (FROB) did not perform as well as expected in an issuance of bonds earlier this week, highlighting the difficulties that the country's banking sector is faced with.
The fund managed to raise 1.75 billion euros through a 5-year bond, priced at 270 basis points over mid swaps , a range 10 times wider than its first issue in November 2009. Over 60 percent of subscribers were domestic investors.
The sovereign-backed bond had been expected to raise 3 billion euros to plug a funding gap in the country's financial system.
The Bank restructuring program is aimed at reassuring investors that the financial system is robust following a property boom that crashed in 2007 leaving banks saddled with bad loans and raising the spectre of an expensive government bailout.
The FROB bond issue comes days after savings banks Bankia and Banca Civica published the details of heavily discounted initial public offerings in a government-backed move to bring private capital on their balance sheets.
The fund paid out 10 billion euros to the first phase of the restructuring process, to encourage mergers of the country's cajas and managed to reduce their numbers from to 17 from 45.
The second phase will concentrate on boosting solvency ratios among the cajas. The Bank of Spain estimates a capital shortfall of 15 billion euros in the banking system to bring capital ratios up to tough new minimum levels. However, this figure will fall if the Bankia and Banca Civica IPO's go ahead, as the minimum solvency ratios demanded by the government are reduced after banks are able to acquire private funding.
The FROB now has around 6.6 billion euros available to partially nationalise cajas that are unable to secure private investments.
Industry analysts expect Alicante-based CAM to be the first caja to be nationalised later this month., asking for 2.8 Billion from the fund.