Six Spanish savings banks planning alliance

28th May 2010, Comments 0 comments

Six regional savings banks in Spain on Friday announced they are negotiating an alliance that will help them avoid insolvency, in line with appeals by the central bank.

Caja Madrid, Caja Insular de Ahorros de Canarias, Caixa Laietana, Caja de Avila, Caja Segovia et Caja Rioja are negotiating "the possible formation of an institutional system of protection (SIP)."

The SIP is an agreement between financial institutions that does not involve a formal merger but which seeks to guarantee liquidity and solvency.

Spanish banks got off relatively lightly from the subprime mortgage crisis in 2008 as the country's strict regulations meant they did not invest heavily in the high-risk loans that hurt financial institutions elsewhere.

But many, especially smaller unlisted saving banks that are usually controlled by regional politicians, were badly hit by the collapse of the country's once-booming property market, both through loans to developers and mortgages.

The Bank of Spain has called for consolidation by regional savings banks if they are to survive the economic crisis, and several such mergers have taken place or are being negotiated.

The central bank on Saturday took control of one troubled savings bank, CajaSur, after it failed to complete a planned merger with another bank.

CajaSur will be managed by representatives of an offshoot of the Bank of Spain, the Fund for Orderly Bank Reconstruction (FROB) a nine-billion-euro fund set up by the government one year ago to help struggling banks merge or restructure.

Friday's announcement came as rating agency Fitch downgraded Spain's credit rating due its poor growth prospects and warned that the cost of restructuring the savings banks "could be substantial."

The Socialist government has introduced a fresh round of austerity measures aimed at bringing the public deficit down to a euro zone limit of three percent of gross domestic product from 11.2 percent last year.

The measures were approved by the parliament on Thursday by just one vote.

© 2010 AFP

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