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Spanish banks' woes top of next government agenda

Source: Reuters - Tue 15th Nov 2011

Top of the agenda for Spain's next government will be deeper financial reform to clean up banks' balance sheets laden with soured property assets and to break the stranglehold on credit which is stifling economic growth and job creation.

Polls show the opposition centre-right People's Party, or PP, is set for a runaway election win over the ruling Socialists, who voters see as having mismanaged the economy. "The top priority for the government has to be the health of the financial system, because if there is credit collapse then there is no possibility of an (economic) recovery," said a financial adviser who is also close to the PP.

Some bankers have suggested the state set up a "bad bank" to take over unsellable property left over from the crash of a prolonged real estate boom, taking a liability off of the banks' balance sheets and holding it until the economy picks up again.

Also, PP leader Mariano Rajoy is said to be looking at high-profile bankers on his list of possible economy ministers, an appointment that would help the new administration ensure Spanish banks' have a strong voice in the European debate.

Spain's Socialists, in power since 2004, have already done a major restructuring of the banking sector in an effort to convince markets that the country is not heading for a bailout like Greece, Portugal or Ireland.

Weak savings banks have been forced to merge with each other and boost capital, but there is still an excess of capacity in the sector and more consolidation is on the cards, said Jaime Sanz Legaz at think-tank FAES, which has influenced PP policy.

"More branch closures and job cuts are required and the banks need to continue to deleverage," Legaz said.

Spain's banks were exposed to a property boom that went bust in 2008, forcing them to make provisions of billions of euros for bad loans to developers, which has eroded their capital and profits and restricted lending. Meanwhile, unemployment in Spain shot up to 22 percent and the economy is heading into its second recession in three years.

The Bank of Spain recently estimated the sector had about 176 billion euros worth of doubtful property assets. Bad loans as a percentage of the total is running at more than 7%, the highest rate since 1994.

"The real issue threatening Spanish banks is exposure to domestic real estate. No European Union summit has tackled this and the current government has not had a real plan to tackle this either," said David Bach, political analyst at the IE business school in Madrid.


Rajoy says one of the first things the likely new government will do is force banks to mark property assets to market price and then recapitalise the banks that are left with a big hole, possibly with money from the European financial rescue fund.

But economists question how property on banks' books can be re-valued since the real estate market is largely frozen.

"If the banks were to write down their property holdings today the whole financial system would go bankrupt... We can't risk that," said Juan Jose Toribio, economics professor at the IESE business school in Madrid.

"Cleaning up the system is very difficult at the moment. There has to be some sort of mid-way solution between writing down property assets, which would require a massive recapitalisation effort, and allowing them to fester on banks books," he said.

One alternative gaining more ground with bankers is the creation of a bad bank to manage all the toxic assets. Rajoy says it is not his first option, but he does not rule it out.

"If (a bad bank) it is properly managed and executed, I think it is a very good idea," Juan Maria Nin, deputy chairman of Spain's fourth biggest bank Caixabank said last week.


Spain's bankers may have little choice in accepting tough new measures to overhaul the sector, but in return they will expect a new administration to fight their corner in European debates.

"The most important question for the Spanish banks is how the government is going to deal with the new European recapitalisation plan. I think this will overshadow any other medium-term proposal," Bach said.

"The banks will want Europe to provide the money to shore up capital," he said.

The Socialists have been criticised for their weak defence of Spain's banks after the European Banking Authority said they needed to raise 26 billion euros of extra capital to withstand sovereign debt losses.

"Germany and France outsmarted other countries to have their sovereign debt valued at AAA, knowing they are going to take a big hit on their Greece exposure. Spain, with no Greek debt, allowed its own debt to be valued much lower. We should have argued harder," said a senior Madrid-based banker.

One way of ensuring the banks' voice is heard on the European stage is to appoint a top banker with an international profile to lead the economic team, political sources say.

One person Rajoy is reportedly considering is Francisco Gonzalez, head of Spain's second largest bank BBVA, one of the few surviving corporate leaders from among those appointed to run former state firms during a wave of privatisations in the PP's last legislature in 1996-2004.

A former stockbroker, Gonzalez has kept his distance from Socialist Prime Minister Jose Luis Rodriguez Zapatero over the past seven years, while staying close to PP circles.

Gonzalez has been more open in the past about criticising economic policy that has failed to work, Legaz said.

"His thinking is shared by the chairmen of all the banks and savings banks, but he is the one who has said the most in public," he added.

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