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Spanish bank reform advances

November 29, 2012

MADRID, Nov 28: Spain advanced on Wednesday with a major overhaul of its stricken banking sector after Brussels approved EU-funded restructuring plans, while nationalised Bankia announced 6,000 job cuts and forecast a huge loss.

Meanwhile the Bank of Spain delivered more bad news on the overall economy, saying the country appeared stuck in a job-killing recession in the fourth quarter.

The European Commission cleared the restructuring of four Spanish banks — Bankia, NCG Banco, Catalunya Banc and Banco de Valencia — paying the way for Spain to receive next month some 37 billion euros of the EU funds to help clean up their balance sheets.

The Commission said the restructuring of the four banks “will allow them to become viable in the long-term without continued state support” while the plans contain provisions to limit distortions to competition. Banco de Valencia, whose independent future could not be secured, will be sold and integrated into CaixaBank, the Commission said in a statement.

“The approval ... is a milestone in the implementation of the (accord).... Our objective is to restore the viability of banks receiving aid so that they are able to function without public support in the future,” European Competition Commissioner Joaquin Almunia said in the statement.

“Restoring a healthier financial sector capable of financing the real economy is indispensable for economic recovery in Spain” Almunia added. Bankia, whose 20bn euro bailout by the government in May prompted Spain to seek funding of up to 100bn euros from its eurozone partners in June to help rescue its banks, is set to get 18bn euros of the latest funds.

NGC will get 5.5bn euros of the payment, with Catalunya Banc 9.0bn euros and Banco de Valencia 4.5bn euros. When combined with aid previously extended to the four by the Spanish government, Bankia will have received about 36bn euros, NGC 10bn euros, Catalunya Banc 14bn euros and Banca de Valencia 7.0bn euros, or 67bn euros in all.

Bankia, whose shares were suspended from trading on Wednesday by regulators, said after the Brussels announcement that it would cut 6,000 jobs, about 28 per cent of its staff, by 2015 and close 39 per cent of its branches. The bank said it intended to return to profit in 2013, but warned that it expected to report a huge loss of 19bn euros this year.

The bank is symptomatic of the problems of the Spanish banking sector, and an example of the problems eurozone states face with helping banks. Formed in 2010 from the merger of seven regional savings banks which expanded too fast and were shackled by a mountain of debt which went bad after the property bubble burst in 2008, Bankia posted a loss of nearly 3.0bn in 2011.

The government’s bailout of Bankia pushed it to seek the EU help to clean up its banks, with the added debt fuelling concern that Madrid may need to seek a full sovereign debt bailout. Prime Minister Mariano Rajoy has resisted pressure to ask for further help and those fears have eased.

Shrinking balance sheets

The Commission said that the balance sheets of Bankia, NCG Banco and Catalunya Banc would shrink by more than 60 per cent by 2017 compared with 2010, highlighting how over-extended the banks had become.

In order to receive the EU funds Spain agreed to create a so-called bad bank, which will take over 45bn euros in toxic assets from the restructured lenders at heavily reduced prices. The banks henceforth will focus on their “historical core regions. They will exit from lending to real estate development and limit their presence in wholesale business,” said the Commission.

Notably, the fact that the banks and their shareholders are absorbing part of the losses means the overall state aid needed will be reduced by about 10bn euros, it added. Wednesday’s decision clears the way for the banks to receive aid from the European Stability Mechanism (ESM), the new eurozone defence system which formally became operational last month.

The four banks concerned on Wednesday had all previously received help from Spain’s Fund for Orderly Bank Restructuring (FROB) and it is this body which will channel the ESM funds to them.

The Bank of Spain said in a monthly report that “overall information available points to output still falling in the final months of 2012.” Last month, Spain said it had moved into a second year of recession with output shrinking 0.3 per cent in the third quarter, as the unemployment rate hit 25 per cent.

The Spanish economy, the fourth-biggest in the eurozone, has been shrinking for 15 months even as the right-leaning government imposes sweeping austerity measures in the teeth of rising street protests. The government is tipping a contraction of 1.5 per cent this year. —AFP