Spain to Ramp Up Bailout of Banks

by
January 20, 2011

By SARA SCHAEFER MUÑOZ And JONATHAN HOUSE, The Wall Street Journal

Spain plans to pour billions more euros into its troubled savings banks and force them to be more open about their lending practices, people familiar with the matter said, an acknowledgment that previous efforts to fix the banks have fallen flat as the country seeks to ward off an international bailout.

In a first step, Spain is preparing to issue €3 billion ($4 billion) in debt in coming days, the people familiar with the matter said. Government officials are putting plans in place to eventually raise as much as €30 billion, according to these people, though some say the final tally will be less.

The hope is that a series of capital injections will quell investor jitters about the savings banks, known as cajas (literally, “boxes”), which have been a thorn in Spain’s side as it seeks to convince investors that the country’s finances are stable.

The fate of the cajas is inextricably tied to the fate of Spain and potentially to the euro itself. Fear that the savings banks can’t raise funds on their own and will need a government bailout was one reason ratings agency Moody’s put Spain’s rating on review for a downgrade last month.

Another step the government is taking to boost investor confidence in the cajas is simplifying their complex structures, making them more like traditional banks. The cajas have long had confusing ownership and governance structures and disclosed far less financial information than other banks. Their boards consisted of local politicians, union members, clients and, in some cases, Catholic priests, many of whom were reluctant to relinquish their influence over lending decisions.

The Spanish government last year forced a wave of mergers among the cajas—reducing their number from 45 to 17—but confusing, unwieldy structures persisted, scaring off investors. Another part of last year’s rescue attempt was an injection of €11 billion via the newly formed Fund for Orderly Bank Restructuring. At the time, Spain said it could put up to €99 billion into the fund, but until recently had said further injections wouldn’t be necessary. Now, it’s reversing course.

Going forward, people close to the matter say, the idea is to force the cajas to transform themselves into centralized, transparent entities that more closely resemble traditional banks by placing all of their assets into a central holding company and streamlining management. The changes would be made either through legislation or by making it a condition of accessing government funds.

“We think that the restructuring and recapitalization of the savings bank sector is probably the most important issue for the government at this juncture,” said Antonio Garcia Pascual, an economist at Barclays Capital.

Raising any new capital for the cajas carries risks, as it comes on top of Spain’s existing financing needs. Economists estimate that the country needs to borrow €125 billion this year just to finance its deficit and roll over maturing debt.

Many of the cajas, which account for €1.3 trillion in assets—or 42% of total bank assets in Spain—used liberal lending practices to fuel a decade-long housing boom that went bust and left many of the institutions holding billions in bad loans and facing heavy losses.

The new moves reflect the fact that last year’s fixes didn’t stick. The shotgun weddings forced by the government proved difficult to execute in practice, with the governing boards of merged cajasbickering over issues like labor, salaries and operating hours. In most cases, the new banks only partially merged their assets.

To read more, visit: http://online.wsj.com/article/SB10001424052748703951704576092133248887432.html?mod=googlenews_wsj

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