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Spain readying fresh bank funding plan

Source: Reuters - Thu 20th Jan 2011

Spain is finalising plans to find fresh funds for its troubled savings banks, officials said, prompting speculation the government may have to spend more while fighting to slash a massive deficit.

Madrid hopes the regional banks can raise the capital - which the sources denied would reach the 30 billion euros cited in a newspaper report - from private investors. No private capital deals have yet been struck.

Spain will have to raise more capital in the money markets to shore up a banking system heavily exposed to a collapsed property market, economists say. The regional banks are at the heart of concerns Spain may seek an Ireland-style bail-out.

"The recapitalisation will have to be done, and to a large extent be absorbed by the government," said Antonio Garcia Pascual, analyst at Barclays Capital.

The government will announce details of the recapitalisation plan once the savings banks have laid out their full exposure to Spain's collapsed property sector in coming weeks, a government source said on condition of anonymity.

Ratings agency Fitch maintained a negative outlook on Wednesday for Spain's regional savings banks. Most medium- to small-sized savings banks are rated in the 'BBB' range.

Spain is whittling down one of the euro zone's largest public deficits through broad spending cuts, but economists fear a potential capital shortfall in the savings banks and poor regional government finances could scupper its efforts.

The economy ministry says the regions have met their deficit targets for 2010. But the biggest regional government, Catalonia, said it would cut 2011 spending by 10 percent after missing its deficit goal last year and being cut off from fresh borrowing, daily El Pais reported on Thursday.

Spain's risk premium over benchmark German debt narrowed on Thursday, building on recent optimism over long-term changes to the European rescue fund (EFSF). It fell 11 basis points to 216 bps, its lowest level since mid-November.

Ben May, an economist at Capital Economics, said regional administrations would have to sign up to Spain's austerity programme, though there would be a price to pay for Madrid.

"The regions are going to have to make some stringent cuts, with all the political kickbacks that implies," he said.


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