Spain hopes bank reform will help avert bailout (News Feature)

By Sinikka Tarvainen Jan 21, 2011, 12:00 GMT

Madrid - Spain is stepping up efforts to reform its heavily- indebted 'cajas' savings banks in the hope that the overhaul may help avert a possible international bailout.

While banking giants such as Santander or BBVA are believed to be robust, there is concern about cajas: smaller local banks that hold about 40 per cent of bank assets in Spain.

The cajas had lent heavily to the construction sector, which contributed about 10 per cent of the country's gross domestic product (GDP) prior to the global crisis. The crisis sparked a meltdown of the overheated construction sector, leaving the cajas facing heavy losses.

The government now fears that their vulnerability could become an important factor in eroding market trust in Spain's solvency, eventually forcing a bailout that could threaten the very existence of the euro.

There have been concerns that Spain - one of the eurozone's largest economies - could follow Greece and Ireland in needing to be rescued financially by the European Union and the International Monetary Fund.

To counter such worries, Madrid has often cited the solidity of its banking sector as evidence of a healthy economy. The ratings agency Moody's, for instance, ranked the Spanish banking sector as one of Europe's staunchest in December.

But cajas have their own problems. Their efficiency is undermined by their small size, their politicization - with current or former politicians often sitting on their boards - and their lack of financial transparency.

'Doubt persists' that the cajas remain 'vulnerable,' Prime Minister Jose Luis Rodriguez Zapatero said recently as he urged them to 'improve their capital structure ... to get credit flowing again.'

Worried about how financial markets perceived the cajas, the government pressured them into merging with each other, triggering a process that will eventually reduce their number - from 45 to 18. Many such mergers, however, will only be partial.

The government also injected 11.5 billion euros (15 billion dollars) into the cajas from the newly-constituted bank restructuring fund FROB, but that measure turned out to be insufficient to solve their liquidity problems.

The Zapatero government is now expected to issue billions of euros in debt bonds in order to obtain more funds for the cajas. The savings banks may eventually need anything between 17 and nearly 43 billion euros, according to different estimates.

In fact, the government might even have to consider a partial and temporary nationalization, the daily El Pais said Friday.

Zapatero also wants to use an existing law, and may adopt new legislation, to push through what analysts describe as the biggest upheaval in Spanish savings banks' 200-year history.

The goal is to make the cajas more centralized and transparent - transforming them into entities resembling traditional banks and reducing the influence of politicians.

Such bank-like cajas would be able to raise private capital by floating shares on the stock exchange. The government also wants savings banks to cut costs by closing offices and reducing staff.

Some of the cajas are already taking steps in this direction.

However, the reforms carried out so far have failed to reduce the number of politicians in the cajas' governing organs.

There is also concern that the reforms could affect the charity work that has been traditionally done by the cajas, as well as their availability in rural areas.

'In a few years' time ... the sector of the cajas will be very similar, if not identical, with the banking sector,' trade unionist Jose Miguel Villa said.

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