Spanish parliament gives wide backing to banking reform

Feb 16, 2012, 12:58 GMT

Madrid - The Spanish parliament on Thursday gave wide backing to a financial reform aimed at forcing banks to clean up their balance sheets and at restoring investor confidence.

The reform obliges banks to set aside provisions to cover toxic real estate assets. Economy Minister Luis de Guindos put the total amount of the provisions at 52 billion euros (67 billion dollars), up from an earlier estimate of 50 billion euros.

The reform had been certain to be approved by parliament, where Prime Minister Mariano Rajoy's conservative People's Party (PP) has an absolute majority. But it also received the backing of the main opposition Socialist Party and several smaller parties.

The reform received 303 votes in favour and only 28 against, while six legislators abstained.

The financial reform, which was approved by the government earlier this month, focuses on bad assets left over from the previous housing boom.

The boom collapsed during the global crisis, contributing to Spain's most serious economic crisis in decades. The economy has now ground to a standstill while unemployment has rocketed to nearly 23 per cent.

Banks must meet the provisions by the end of the year. But those that announce merger plans by May 30 have one more year to do so, in a move by the government to encourage mergers. Merging banks will have access to loans from the bank restructuring fund FROB.

Spanish banks are estimated to have about 175 billion euros in troubled assets.

The banking sector suffered heavy losses Thursday on the Madrid stock exchange, pulling the main Ibex 35 index down 2.4 per cent by midday, after the ratings agency Moody's said it was reviewing 114 European financial institutions, including 21 Spanish ones.

After taking power in December, Rajoy's government first slashed spending in an attempt to reduce the budget deficit, which is estimated at 8 per cent for 2011.

The government has also adopted a labour market reform lowering severance pay, which has infuriated trade unions.

The reforms did not convince Moody's, which downgraded Spain's credit rating to A3 from A1 this week.

Spain nevertheless successfully raised 4 billion euros in three bond issues on Thursday. Three-year bonds saw their yield rise, while 3.5- and 7-year bonds fetched lower interest rates.