Spain's banks must boost capital or face Government takeover

 

Spain's savings banks, considered a fiscal liability for the government, have seven months to raise capital through private investors or the state will partially take them over, Economy Minister Elena Salgado said on Monday.

Concerns that Spain's savings banks, which account for 50 percent of the financial system, will require an expensive bailout have weighed on the country's sovereign debt and fueled fears it will need an EU/IMF-backed bailout like Ireland.

"The government considers it necessary to take a number of measures to dispel any doubt over the solvency of our credit entities and their ability to withstand shocks even under the most adverse scenarios, and so ease their access to capital markets," Salgado said during a news conference.

In a move to restore market confidence, Salgado announced a regulatory overhaul of the banking sector, obliging all banks to boost core capital ratios to a new minimum of 8 percent by September.

Requirements for savings banks could be even tougher.

Salgado estimated a total of no more than 20 billion euros in state funding would be required to temporarily take over weak banks. This compares with average analyst estimates of 50 billion euros for the savings banks alone.

She said the plan for the savings banks, which were already forced last year into a round of mergers, would not harm the government's target of cutting its budget deficit to around 6 percent this year.

"Raising the bar to 8 percent is quite a tough move, but I think that it could be tight and 8.5 percent to 9 percent might be what is really needed," said a senior bank official, who spoke on condition of anonymity.

The average capital ratio for Spain's banking sector is 8.5 %, according to most recent data, Salgado said.

CONFIDENCE BOOST

Earlier on Monday, rating agency Moody's Investors Service said Spanish government moves to enhance the solvency and transparency of debt-laden and mostly unlisted savings banks could improve their credit ratings and help to improve market perception of the government's own credit profile.

Recent hopes of greater transparency and a definitive plan for the banks sent Spain's 10-year benchmark bond to its highest price since mid-November on Monday.

While the government is hoping for private interest in the savings banks, this could be difficult, given a lack of visibility, unfamiliarity with the banks and a wider distrust of assets linked to Spain's property market.

"If you want to put more equity capital into an institution, there has to be a good reason from a future return perspective, which lies behind the logic of mergers," said Richard Lacaille, global chief investment officer at State Street Global Advisers.

"But I think investors would have to be certain they weren't putting capital in to pay off losses incurred in the past, so there would have to be a very clear and realistic evaluation of the losses," he said."