MADRID Spain is expected to present new reforms to complete the clean-up of its banks on Friday after difficult last-minute talks between the government and lenders.
At its weekly cabinet meeting, the government will approve a plan to force banks to park their toxic real estate assets in holding companies that would later sell them off.
The cabinet is also expected to announce demands for the banks to set aside a further 35 billion euros ($45 billion) to cover sound loans in their real estate portfolios. The government has already forced banks to make provisions of 54 billion euros to cover bad assets.
"The text is being finalized after talks with the banks," a government source told Reuters, adding that both the new provisions and the "bad bank" scheme would be approved on Friday.
Earlier, financial sources had suggested the reform could be partly delayed to allow more time for negotiations between the government and major banks.
Hoping to put an end to its four-year banking crisis, Spain effectively took over Bankia SA, one of the country's biggest banks, this week after days of market anxiety over the lender's viability.
The Bankia takeover and expectations for further financial sector reforms pulled Spanish stocks off the nine-year low they hit a day earlier, with the blue-chip index rebounding 3.66 percent.
Spain's banks were hit by billions of euros of losses after a decade-long property bubble burst in 2008 and concerns about them, and the country's overspending regional governments, have fanned fears of a new euro zone debt crisis.
The government aimed to ask the banks to set aside 30 percent of their sound loans to housebuilders from a current 7 percent but the banks hoped to agree on 25 percent.
The toxic assets now total 184 billion euros, but many fear the hole is even bigger. Successive waves of bank sector clean-ups have failed to convince investors.
The creation of holding companies for each bank's problematic property assets would be voluntary for lenders able to make the provisions with no external help. But those that cannot would be forced to set up liquidation schemes and request public money, the sources said.
A senior euro zone source said an outside audit of the health of Spanish banks was key to reassure investors that the difficult situation of the banks would not push Spain into seeking an Irish-style bailout.
"What are you going to do to ensure that this transparency, especially of real estate valuation, has consequences for provisioning and recapitalization measures?" the source said.
"Quite obviously ... it is too early for (Economy Minister Luis De Guindos) to give definitive answers to these questions but I expect that he will be able to offer a plan ... to increase transparency possibly via using outside expertise."
Financial sources said the appointment of external auditors could lead the banks to recognize further losses on top of those already reflected in banking reforms presented in February.
But any delay in the new banking reform could have a devastating effect as yields on benchmark Spanish bonds remained close to six percent, making the country's borrowing costs very high.
"The pressure right now is very high and the discredit would be huge if the reform was not to be approved this Friday," a banking source told Reuters.
($1 = 0.7716 euros)
(Additional reporting by Jan Strupczewski; Editing by Fiona Ortiz and Giles Elgood)