Spain announces €50bn financial sector reform

By María Gómez

Date: Friday 03 Feb 2012

Spain’s Economic Minister Luis de Guindos announced last night the financial sector reforms to clean up bank balance sheets.

The new restructuring requires Spanish financial institutions to set aside €50bn to cover losses from bad real estate sector loans and to achieve this cushion by January 1st, 2013.

To summarise, the Spanish government is increasing the required amount of provisions in order to protect against bad loans and its objective is “to increase confidence and clear up doubts on these assets, the ones that cause the most uncertainty in the market,” said De Guindos.

The Minister of Economy considers the €50bn increase in provisions to be “substantial” as he noted that between 2008 and June of 2011, the Spanish banking sector set aside a total of €66bn. However, De Guindos pointed out that the Spanish market has approximately €175bn of troubled assets.

Merging banks will have a somewhat longer timeline. By presenting their plan to the Bank of Spain (prior to May 31st), the new company will have a full two years to raise the necessary provisions.

As expected, De Guindos played politics in his presentation, insisting that no public funds will be used to finance the restructuring. However, he did admit that the public fund for orderly bank restructuring, called the FROB, will increase its allotment by €15bn to €105bn and finally had to admit that this money would undoubtedly come from the Spanish Treasury.

The benefits, according to the Minister, will also be for Spanish citizens. According to De Guindo, the reform will restore market confidence; allow banks access to financing and thus open up the flow of credit to John Q public. He added that forcing banks to mark their real estate assets to market will “facilitate them being sold on the market and citizens will benefit from lower housing prices.”

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