Spain Makes Banks Pay for Cajas’ Overhaul to Shield Budget

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October 06, 2011, 11:32 AM EDT By Emma Ross-Thomas and Charles Penty

(Updates with quote in third, fifth paragraphs.)

Oct. 6 (Bloomberg) -- Spain will make commercial lenders assume losses generated from the overhaul of savings banks through a decree law shielding public finances from the cost.

Spain’s industry-financed deposit guarantee funds will be united into one entity that bears the losses that may arise when lenders seized by the state are sold. The combined facility, which will still be responsible for backstopping deposits, has 6.59 billion euros ($8.75 billion) in equity, Finance Minister Elena Salgado said today.

“The financial sector will assume, in their entirety, the costs that may arise from the clean-up and restructuring of the financial sector,” Salgado told reporters in Madrid. “We’re doing it now because it’s now that we perceive the possibility that the process could produce losses.”

The measure will shield the budget deficit from bank losses as the Socialist government struggles to meet its pledge to cut the euro region’s third-largest shortfall. The changes will be passed by decree while Parliament is closed just six weeks before a general election that polls show the ruling Socialists will lose.

Protecting Finances

“It’s a way to protect the government finances from more losses in the banking system because basically there’s no more money,” Ricardo Wehrhahn, a partner at Roland Berger Strategy Consultants in Madrid, said in a telephone interview. “There are some significant funds in the deposit funds and so the government is looking at those resources.”

Spain’s bank-rescue fund, the FROB, took over three more lenders on Sept. 30 that failed to meet a deadline to reach new capital requirements, bringing to six the number of institutions the state has seized. The Bank of Spain is trying to sell Caja de Ahorros del Mediterraneo group, which it seized in July, by the end of the year and Governor Miguel Angel Fernandez Ordonez said last week the process may generate losses.

Salgado said the changes will be passed by decree and can be ratified by Parliament’s permanent committee, which continues to meet for urgent matters while the assembly is closed.

The Spanish Banking Association signaled its opposition to using funds raised by commercial lenders’ contributions to pay for losses created by savings banks. Until now, banks and cajas, as the savings banks are known, each had their own deposit- guarantee funds.

Different Funds

“The unification should treat appropriately the fact that the banks’ and cooperative lenders’ deposit-guarantee fund have raised an important amount of money (3.88 billion euros), which it seems they now want to use for aid to the savings-bank sector,” the association said in an e-mailed statement.

Commercial banks including Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA haven’t received state rescues. Bailouts have focused on the cajas as the government has nudged the unlisted, regional savings banks into becoming commercial lenders and merging with others.

“It looks very tricky,” Wehrhahn said. “It’s a way to finance the FROB but the FROB is a public entity and the commercial banks are private and you shouldn’t really make them pay.”

The FROB, created in 2009 with 9 billion euros of equity and the ability to take on as much as 90 billion euros of debt, said last week it would spend 7.55 billion euros to take over Unnim, CatalunyaCaixa and Novacaixagalicia savings banks. That comes on top of the 10 billion euros committed in a previous round of recapitalizations via preference shares.

Elections

Spain’s Socialist government is fighting to reduce the budget deficit to 6 percent of gross domestic product this year, from 9.2 percent in 2010. Salgado reiterated today that goal is “unconditional.”

The move comes before a Nov. 20 general election that polls indicate the ruling Socialists will lose to the opposition People’s Party. Socialist candidate Alfredo Perez Rubalcaba, a former deputy prime minister and friend of Salgado, has focused on the banks in his campaign and pledged to create a levy on them if he’s elected as well as increasing taxes on the wealthy.

The last local elections in May were marked by nationwide protests against bank bailouts and austerity measures, and Rubalcaba has said he is listening to the demands of the so- called “indignant ones.” While Salgado said she spoke to the PP about the measure, she offered no details on their views. No one at the opposition party was immediately available to comment today when contacted by Bloomberg News.

--With assistance from Manuel Baigorri in Madrid. Editors: Jeffrey Donovan, Andrew Davis

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net;

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Craig Stirling at cstirling1@bloomberg.netCraig Stirling

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