Fears over Spain linger despite banking plan

Sun May 13, 2012 9:53am EDT
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By Sophie Sassard and Sarah White

LONDON (Reuters) - Spain's clean-up plan for its troubled banks lacks some of the key ingredients that helped other governments restore faith in their financial sectors, restructuring experts said, pointing to a potential need for heavier state intervention.

Madrid told lenders on Friday to put aside even more funds against potential losses from dubious property loans, but limited its role in the rescue to providing high-interest financing for the weakest banks.

More explicit back-up from the government, in the form of an insurance scheme to cover extra losses on toxic assets - akin to one of the steps taken by Britain after the financial crisis - might have been needed at this stage to keep the growing crisis at bay.

"It's bad news. The plan is well-thought through but it will disappoint the markets as the state is not backing it through public financial guarantees on the future losses," said one banker close to Bank of Spain and involved in the restructuring talks.

The banker was not authorized to speak to the press, like many of the financial experts still hoping for a role in sorting out Spain's finances.

Spanish banks stocks fell on the government's announcement on Friday, while Spanish country risk rose.

Madrid had initially come to terms with the idea of providing guarantees if banks' losses were to exceed provisions, the banker involved the talks said, adding that the euro zone's 700 billion euro ($900 billion) bailout fund - the European Financial Stability Facility - or else the International Monetary Fund could have provided Spain with a backstop guarantee for the plan.

"This would have been a strong message to the markets that EU politicians are determined to address the situation. But in the end, the government didn't have the guts to go as far as they should have," the banker said.   Continued...