Spain's government on Friday, May 11, launched its latest campaign to restore confidence in its embattled banking sector, telling lenders they will have to park nonperforming real estate loans in new entities that will be sold off and submit themselves to an independent audit.
The new initiatives, which also include a demand for €30 billion ($38.8 billion) in new funds to be set aside to cover loans remaining on the lenders' books, are the latest and most drastic in a series of state-backed plans that have so far failed to quiet anxiety about Spain's domestic lenders. The regional banks, or cajas, have been crippled by an estimated €184 billion exposure to nonperforming Spanish real estate assets.
Madrid's center-right government has acted to "give credibility and confidence to our financial system, get credit flowing, and to allow for real estate [assets] to be sold at reasonable prices," Spain's Deputy Prime Minister Soraya Sáenz de Santamaría told a news conference following the Cabinet's approval of the latest measures.
The move comes days after Prime Minister Mariano Rajoy backtracked on a promise not to use state funds to bail out troubled banks. On Wednesday, he nationalized Bankia SA by converting €4.5 billion of preference shares in its parent company, leaving the state with a 45% equity stake in Spain's No. 3 lender.
The market's immediate response to Friday's announcement suggested that investors had mixed feelings about the plan. All seven of Spain's biggest lenders traded down on their previous closes, though they were marginally higher than their valuations prior to the government's statement.
"A comprehensive bad-bank plan may be positive for the sector in the long-term, but shareholders would face an upfront dilution and question marks would remain on the sovereign position," Macquarie Equities Research wrote in a note to clients.
Banks will have until the end of the year to split their loans portfolios, with real estate-related loans moved into off-balance sheet vehicles that will be sold at market value, Spain's finance minister Luis de Guindos said Friday.
In addition to hiving off the most toxic real estate assets, Spain's banks will have to increase the coverage for loans made to property developers that remain on their books from 7% to 30%.
The new measures will require Spanish banks to find about €30 billion of new funds just three months after providing €50 billion of capital that Rajoy's government told them to set aside in February. The government has given the banks 15 days to submit plans outlining how they will conform with the new demands.
Lenders that cannot afford to make the new provision will be forced to take government loans in the form of five-year convertible bonds at a punitive 10% annual interest, just under twice the Spanish government's own borrowing costs. The loans will be provided by Spain's state-backed bank restructuring fund, Fondo de Reestructuración Ordenada Bancaria.
Banks will also be subject to an independent audit of their loan books, a move that the government hopes will end lingering doubts about hidden losses.
"Without certainty about the solvency of the banking sector, economic recovery is much more difficult," de Guindos said. "It is imperative to take measures to ensure the solvency and that the government has made today the appointment of two entities to value the loan portfolio of banks in Spain."
The European Commission had earlier requested an independent audit of Spain's banks, noting that it was imperative to restoring confidence.
Spain's cash-strapped government said that its plan would not involve an injection of state cash into the banks, noting that the support would come only in the shape of the loans. Of course, the government had made the same claim in the weeks before it converted its Bankia loan into equity.