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Spanish cajas may need a further €50 billion

Mon 28th Feb 2011

Spain's banks could need a further €50 billion to strengthen their solvency and regain market confidence, in excess of double the amount the government said would be required, according to a report released earlier today by Moody's Investors Services.

The forecast has risen from the €17 billion predicted by Moody's before Christmas, and would be mostly concentrated around the troubled cajas, senior analyst Alberto Postigo commented in the rating agency's Weekly Credit Outlook report.

The revised calculation assumes that the cajas will need to acheive a core capital ratio of 10% in coming months, in line with new banking rules approved earlier this month by the Spanish government.

The changes call for minimum capital ratios of 8% on all the country's banks, but set a higher level of 10% for lenders that don't have a significant number of private investors among their shareholders, and depend on wholesale markets for their financing, which is the case for the majority of cajas.

In order meet the higher requirements, Spain's cajas are scrambling to find private investors willing to buy parts of their businesses. 4 out of 17 lenders have said they plan to sell shares to the public.

The Spanish government said banks will need to raise about €20 billion to satisfy the new rules and said it will take stakes in lenders that fail to do so by September, through its Fund for Orderly Bank Restructuring, amounting to partial nationalisation.

Doubts over the financial strength of the cajas had arose following Ireland's banking crisis, where Like Ireland, Spain is grappling with the collapse of a property boom. In an attempt to remove these doubts from investors' minds, the Bank of Spain obliged the country's banks to disclose the full extent of their exposure to the troubled real estate sector.

Last week Spain's central bank reported that the cajas hold some €100 billion in "potentially problematic" real estate assets, out of a total exposure to the building sector of €217 billion.

Mr. Postigo said that these "potentially problematic" assets are "credit negative" for Spain. However, he added that making public the data is a "significant and positive step" toward restoring market confidence in the banks.

"Confidence in Spain's savings banks will only be completely restored once the problematic exposures are translated into losses and the adequacy of bank capital is robustly tested," he continued.

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