Spain could threaten euro
(26th January 2011 – Europe) Spain is gearing up its economic reforms, in an effort to avoid an international bailout that could threaten the stability of the euro.
The government announced earlier in the week that it would be accelerating an overhaul of the country's savings banks, known as cajas, which is central to the banking sector.
Spain is the eurozone's fourth-largest economy - much bigger than that of Greece and Ireland, which have already been forced to seek bailouts, or Portugal, which is widely seen as the next candidate to do so.
If financial market trust in Spain collapsed to the point of the country needing to be rescued by the European Union and International Monetary Fund (IMF), that would require much bigger funds than the previous bailouts, and could eventually threaten the euro itself.
The financial markets are more concerned about the state of the cajas, which hold about 40 percent of bank assets in Spain, as well as billions of euros in bad loans after lending heavily to the housing sector before it collapsed in 2008.
The government has pumped in about €15 billion (A$20.60 billion) into the savings banks from the recently constituted bank restructuring fund, FROB, and from a deposit guarantee fund.
It also forced a wave of mergers that reduced the number of cajas from 45 to 17.
However, those measures turned out to be insufficient in solving the cajas' liquidity problems and Economy Minister Elena Salgado has now announced tougher reforms to 'dissipate any doubt' about the solvency of the Spanish banking sector.
Cajas and other banks will be required to have a minimum core capital ratio of at least 8 per cent, compared to the current 6 percent.
That goes beyond the targets required by 2019 under the Basel III capital adequacy rules, making Spain one of the world leaders on bank reserve requirements, analysts said.
Cajas, which will be unable to raise sufficient capital on the open market by September, will be injected with liquidity by the FROB, which will take stakes in them for up to five years.
Spain is the eurozone's fourth-largest economy - much bigger than that of Greece and Ireland, which have already been forced to seek bailouts, or Portugal, which is widely seen as the next candidate to do so.
If financial market trust in Spain collapsed to the point of the country needing to be rescued by the European Union and International Monetary Fund (IMF), that would require much bigger funds than the previous bailouts, and could eventually threaten the euro itself.
The financial markets are more concerned about the state of the cajas, which hold about 40 percent of bank assets in Spain, as well as billions of euros in bad loans after lending heavily to the housing sector before it collapsed in 2008.
The government has pumped in about €15 billion (A$20.60 billion) into the savings banks from the recently constituted bank restructuring fund, FROB, and from a deposit guarantee fund.
It also forced a wave of mergers that reduced the number of cajas from 45 to 17.
However, those measures turned out to be insufficient in solving the cajas' liquidity problems and Economy Minister Elena Salgado has now announced tougher reforms to 'dissipate any doubt' about the solvency of the Spanish banking sector.
Cajas and other banks will be required to have a minimum core capital ratio of at least 8 per cent, compared to the current 6 percent.
That goes beyond the targets required by 2019 under the Basel III capital adequacy rules, making Spain one of the world leaders on bank reserve requirements, analysts said.
Cajas, which will be unable to raise sufficient capital on the open market by September, will be injected with liquidity by the FROB, which will take stakes in them for up to five years.
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