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Bank plan builds hope Spain may skirt bail-out

Source: Reuters - Wed 13th Apr 2011

A much-needed overhaul of Spain's banks could give the country just enough impulse to avoid becoming the next domino to fall after Portugal's multi-billion dollar bailout. Spain has sharply reduced the number of regional banks - or cajas - which are at the heart of its problem after taking on too much risk during the country's real estate bubble. From 45 last year, only 17 are left now.

"At least in Spain there's a sense of resolution," said Gilles Moec, an economist at Deutsche Bank.

"(Spain) will end up buffering savings bank capital much more than what they had planned, but there's a plan. In Portugal there doesn't seem to be a plan," he said.

Estimates of how much damage the collapse of the real estate market will inflict on lenders vary wildly, and many fear bigger than expected funding gaps on banks' balance sheets that could yet pose a costly bill for the government.

Portugal last week sought international aid of over 60 billion euros after months of speculation in financial markets, becoming the third euro-zone country to do so after Greece and Ireland.

That has put intense scrutiny on whether neighbour Spain, which has been telling banks to merge and ramp up their capital buffers, can avoid a similar fate. The central bank will this week give a first view on what it thinks of the plans.

Banks have until September to meet core capital ratios of 8% for listed banks and 10% for those failing to list or get more than 20% of private capital, something that several of the merged entities are trying to do.

Those who fail to make the grade must apply for state funds to plug the gap, and the government estimates a capital shortfall of 15 billion euros.

But analysts' estimates of the shortfall are as high as 120 billion euros when future losses related to real estate writedowns are included.


While the country's two biggest banks, Santander and BBVA have lessened their exposure to Spain by aggressive expansion abroad, the troubled cajas account for around half of Spain's fragmented banking system.

"Even though there was a real estate boom and bust in Spain, you do not have significant problems in the large and systemically important banks," said Antonio Garcia Pascual, economist at Barclays Capital.

Caja Mediterraneo's (CAM) request this month for 2.8 billion euros in state funds - twice the central bank's estimated shortfall - was a shock, sparking concerns other banks might also need more money than first thought.

The small savings bank based on Spain's eastern coast - a region littered with unsold holiday developments - had unsuccessfully tried to broker a merger with three other smaller, healthier savings banks.

And even if they are able to raise debt, the larger savings banks are doing so at a significant cost.

La Caixa, Spain's largest savings bank, was forced to postpone its expected six-year covered bond transaction last week, before closing the deal at less favourable conditions with different syndicate banks on Tuesday.

Last week, Barclays said it would inject 1.3 billion euros into its Spanish arm - twice as much as the central bank's estimated shortfall, seen as a signal that tough conditions may persist.

Spain's relatively low public debt - around 60% of GDP, compared to 92% in Portugal - gives it more scope to raise debt to bail out its banks if needed, lessening the chance the private sector could bring down the public.

The cost of insuring Spanish sovereign debt against default has fallen sharply since touching a record high in January and is well below that of Portugal. Spain's banks also have less sovereign debt on their balance sheets, and of a better value.

"The measures that have already been implemented should keep Spain under control, but the Spanish government will remain under scrutiny," said Ralf Grossmann, head of covered bond origination at Societe Generale.

"So many things have happened in the past two years that have made certain investors cautious about Spain."

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