June 26, 2009 / 5:06 PM / 10 years ago

Spain launches $138 billion bank rescue fund

MADRID (Reuters) - Spain on Friday approved a 99 billion euro ($137.9 billion) bank restructuring fund to spur mergers and prevent solvency problems at smaller banks damaging confidence in large, publicly-traded institutions.

Faced with spiraling bad debts after the collapse of a real estate boom, Spain’s Socialist government issued a decree to create the Fund for Ordered Bank Restructuring (FROB), firing the starting gun on an expected wave of bank tie ups and interventions.

“This is a really positive move, they’re taking the bull by the horns and converting systemic risk into selective risk,” said Citi strategist Jose Luis Martinez, who saw the fund restructuring the sector over years rather than months.

The government said it expected some banks to face solvency risks in the next months after bad loans quadrupled in the past year.

“We are trying to avoid problems at any institution,” said Deputy Prime Minister Maria Teresa de la Vega in a press conference to announce the long-awaited fund.

The law will now go to parliament, but as its contents have already been negotiated with the main conservative opposition party, it should be approved without much trouble.

Spain’s tightly regulated banks emerged largely unscathed from the first phase of the global crisis that sparked bailouts across northern Europe and the United States.

But, the Bank of Spain launched its first intervention of the crisis in March and other small and medium-sized banks are expected to suffer losses in 2010 as they dig into capital to cover soaring defaults in recession set to last until 2011.

“Their combined problems could generate possible systemic risk that justifies extra instruments and use of public funds,” according to the decree text.

Moody’s on June 15 cut the credit ratings of 25 Spanish banks, with a third of them seeing their rating drop to D- or lower, meaning they potentially require some outside support such as government aid.

Among those cut were three of Spain’s ten largest savings banks: Caixa Catalunya, CAM (CAHM.MC) and Bancaja.

The rescue fund will start with capital of 9 billion euros, three-quarters of which coming from public funds and the rest from a private deposit insurance agency.

It will eventually have power to borrow up to 10 times that amount, although neither the government nor analysts expect that to be necessary.

BANK OF SPAIN POWER

Wrangling between the government and political parties over the power of the Bank of Spain in the fund has delayed the project for months, with regional governments trying to retain veto powers over savings bank mergers.

If all restructuring attempts fail, the final decree gives the central bank rights to take control of a savings bank and override veto powers of local politicians.

Once the Bank of Spain takes the reins, it will hold five of the struggling institution’s eight board seats and work under the direction of the central bank’s deputy governor.

“This is a good moment to start an ordered restructuring of our country’s financial system,” said Economy Minister Elena Salgado, warning some smaller banks would face problems if the global crisis dragged on but saying none requires urgent aid.

Bank of Spain Governor Miguel Angel Fernandez Ordonez says large banks, such as Santander (SAN.MC) and BBVA (BBVA.MC), remain healthy but small and medium-sized institutions could require support.

He hopes some will disappear, just as they did in the 1980s when a slew of interventions nearly halved the number of savings banks.

“It’s not our intention that everyone survives. The banks that survive must be competitive and can’t get unfair support, they can’t be on a life support system,” he told a congressional commission this week.

Banks which voluntarily apply for funds will be granted up to five years to repay debt.

PriceWaterhouseCoopers expects the Spanish financial system to need between 25 billion euros and 70 billion euros in recapitalization, and suggests banks shrink their size by 12,000 branches or 35,000 employees.

Reporting by Paul Day; Writing by Andrew Hay; Editing by Toby Chopra

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