While major Spanish banks like Santander or BBVA can comfortably cope with their bad real estate loans, there are fears that some cajas may not be able to

This article is more than 9 years old

This article is more than 9 years old

Spain is to partially nationalise its weakest savings banks, or cajas, amid concern about the impact bad loans to building developers may have on the country's financial sector and to calm market jitters about an Irish-style sovereign debt crisis.

A presentation to investors from the state-backed Orderly Bank Restructuring Fund (FROB) says this could be done using the fund if some of the 17 savings banks are unable to raise capital themselves, which analysts see as probable.

"FROB could provide funds directly taking a stake in the entity on a temporary basis," the presentation says.

The government will force cajas to become conventional banks and seek stock market listings, according to Spanish media reports today.

A source familiar with the matter told Reuters the restructuring fund would then take stakes in those banks that could not attract private investment. Until now the fund has acted as a lender to the cajas.

It is unclear whether this will need a change in the law, though the FROB presentation suggests that "new legal reforms could be carried out".

Spain is littered with stalled building developments and has seen land values plunge as the country tries to digest an excess stock of more than 700,000 newly built homes.

This will take several years, meaning that developers are unable to build many of the housing estate projects that they borrowed money for.

While major Spanish banks like Santander or BBVA can comfortably cope with their bad real estate loans, there are fears that some cajas may not be able to.

Five cajas failed Europe-wide stress tests on banks last year. The Bank of Spain has forced them into a round of mergers, reducing their number from 45 to 17 last year.

High levels of bad property loans at the cajas are seen as a major risk for Spain as it slashes its budget deficit to stave off fears it will need an Irish or Greek-style rescue from the European Union and International Monetary Fund.

Estimates of the cost of recapitalising the savings banks range from €17bn (£14.4bn) to €120bn, with consensus falling in the €25bn to €50bn range, according to Reuters.

Economists say Spain could afford that level of rescue without seeking outside aid.

The banking sector has so far set aside €88bn to cover losses on total loans of €439bn to real estate and construction.

Spain's borrowing costs have soared amid worries that the sovereign debt crisis that forced Greece and Ireland to seek bailouts will spread to Portugal and then Spain.

A budget deficit of 9.3% of GDP in 2010 and stagnant growth have added to the worries, though the government is hitting deficit reduction targets and pledges pension and labour reform shortly.

Analysts welcomed the promise of caja recapitalisation. "This underpins hopes that Spain is now on the right track," Commerzbank strategist David Schnautz told Reuters.