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Spain pledges more bank health checks

Source: Reuters - Sat 27th Nov 2010

Spain said it will publish results of extra health checks on its banks next spring and give monthly updates on its public debt, offering concessions to markets focused firmly on fears Europe's debt crisis may spread.

But despite investor unease continuing to push up its debt costs, the country would resist pressures to accelerate fiscal reforms, a source at the prime minister's office said.

"Those who are taking short positions against Spain are going to be mistaken" Prime Minister Jose Luis Rodriguez Zapatero said in an interview with broadcaster RAC1 radio in which he "absolutely" ruled out the need for a Greek- or Irish-style bailout.

Analysts say Spain could reassure investors if it speeded up pension reforms or announced another round of mergers among its troubled savings banks, but almost all agree further austerity measures in an economy struggling to stave off a second recession would do more harm that good.

The source said Zapatero was convinced that any big new measures from Spain would only spread panic on the market. "The markets can't always win. That's unsustainable" he said.

The risk premium demanded by investors to hold Spanish debt compared with German benchmark bonds rose to a euro-era high of 274 basis points on Friday while the euro fell to a fresh two-month low.

Markets have continued to sell off Spain's sovereign bonds on concerns it might eventually be fourth in line after Portugal for a rescue, with worries about the stability of its weaker banks pulled back into focus by the major role that Ireland's lenders played in forcing Dublin into a bailout.

Javier Ariztegui, deputy Bank of Spain governor, on Friday urged the country's unlisted regional savings banks, hard hit by a burst property bubble, to push ahead with mergers and said the results of additional stress tests would be ready by late March.

In the meantime, the banks needed to continue efforts to clean up their balance sheets and show greater transparency, particularly in detailing quarterly results.

The extra stress tests - which would be published ahead of parallel checks due to be conducted in other parts of the EU - would cover "complementary information on promotion and construction, on residential mortgages, detailing collateral and corresponding loan-to-value ratios" he said.


Economy Minister Elena Salgado said Spain's public finances were healthier than expected and it would issue less debt than originally planned by year end but without changing the number of auctions.

With a nominal gross domestic product larger than Greece, Ireland and Portugal combined, Salgado told Reuters this week she believed speculation against Spain was a bet against the single currency.

The prime ministerial source denied Spanish newspaper reports other euro zone countries have put coordinated pressure on Spain to announce more measures though said there were many different views in the currency area.

"There are people who want gestures" he said.

He also said Spain had at times been irritated with comments from German policymakers that it saw as doing more harm than good, but denied Germany and Spain differed over how to sustain the euro.

On Wednesday, Salgado urged Germany not to push its idea of involving private sector investors in any future euro zone rescue plan.

Analysts and economists have said Spain may announce a second round of mergers for its privately held savings banks, many of which collapsed after a 10-year property boom went bust in 2008.

But Spanish officials say the savings banks have almost completed restructuring and that foreign investors will come into the sector soon.

"The government is really choosing between a lot of short straws, but one which has less direct social impact is to put more pressure on the savings banks to complete the restructuring" an analyst with the Ortega y Gasset Institute, Ismael Crespo, said.

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