Spain may embark on risky bank rescue with public money

Spain keeps repeating that it will not pump any more public money into its ailing banks, but the likelihood of that happening is growing by the day. If using public money "were necessary to save the financial system, I would not renounce" resorting to it, Prime Minister Mariano Rajoy said Monday, announcing a reform that would leave "no doubt" about the solvency of Spanish banks. Ads by Google The reform, which is expected to include the creation of a liquidation entity or entities to rid banks of toxic real estate assets, was due to be approved by the government on Friday. But injecting more money into banks would not be easy -- increasing Spain's already heavy debt burden, alarming financial markets and displeasing public opinion, analysts said. With Spanish banks falling on the Madrid stock exchange and a recent downgrade for 11 of them by ratings agency Standard & Poor's, as well as rising borrowing costs for Spain, pressure is mounting on the country to boost investor confidence in its banking sector. Tight credit conditions are also stifling the corporate sector, and the government is in a hurry to get credit flowing again. Concern about Spanish banks has become one of the main factors fanning fears that Madrid will not get its economic problems under control. Spain, the eurozone's fourth-largest economy, is seen as one of the likeliest to eventually need a bailout from the European Union and the International Monetary Fund. The country's economy is in a deepening recession, nearly a quarter of the workforce are unemployed and the government is struggling to trim a budget deficit of 8.5 per cent of GDP. Spanish banks were hit by huge losses after a decade-long property boom collapsed during the global crisis, leaving them with more than 180 billion euros (230 billion dollars) of troubled real estate assets in the form of land, buildings and bad loans. The banking group sparking the most concern is Bankia, a collection of seven savings banks headed by former IMF chief Rodrigo Rato, which had a large exposure to the property sector. Spain has already spent more than 100 billion euros to boost liquidity and the solvency of its banks, including more than 14 billion euros in direct subsidies from the bank restructuring fund FROB, according to figures given by the daily El Pais. Successive banking reforms have also encouraged mergers -- a strategy that has come under criticism as insufficient and even misdirected. "Uniting two bad entities does not create a good one," said Manuel Romera from IE Business School. With the EU demanding more reforms, the government is now planning to separate toxic real estate assets into liquidation companies known as bad banks, although officials avoid using that term. Under the proposals, independent experts would evaluate the assets to be sold off. The liquidation companies would be created on a voluntary basis, according to Economy Minister Luis de Guindos. The government initially said banks would bear the burden of any losses not covered by provisions worth about 54 billion euros, which they were ordered to set aside to cover sour assets and higher capital requirements. But experts say the operation would not be successful without further state involvement. "Without the state taking over the losses, the banks' balance sheets will not be cleaned up. If you create bad banks, someone must assume the risks," said Konrad Becker from the German private bank Merck Finck.

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