Spain sees big bill for bank bad loans

5th January 2012, Comments 0 comments

Spain's new economy minister said Thursday banks may face up to 50 billion euros ($65 billion) in bad loan provisions and he vowed to crack down on regional deficits in a new austerity drive.

Economy Minister Luis de Guindos' estimate of the banks' bad loans, provided in an interview with the Financial Times, was higher than many private forecasts.

De Guindos' comments revealed the scale of the challenges confronting the new right-leaning government: a troubled financial sector, bulging public deficit, and feeble economy with high joblessness.

"If you take international valuations as in the case of Ireland, at the most you are talking about the need for 50 billion euros of extra provisions (for Spanish banks)," De Guindos said.

"In the great majority of cases, they can provide it themselves from their profits, and it could be done not in one year but over several years."

The banks loaned huge amounts of money during the property bubble, which imploded in 2008 leaving them holding piles of doubtful loans and devalued real estate assets.

The property crash also destroyed millions of jobs, leaving Spain with an unemployment rate of 21.5 percent, and sent the economy into a slump from which it has yet to recover.

Banks are now being pressed by new rules forcing them to boost levels of rock-solid core capital, and by the weak economy, which makes it tougher to turn a profit.

The European Banking Authority said in December that Spain's five biggest banks required an extra 26 billion euros in capitalisation.

De Guindos' warning came as Prime Minister Mariano Rajoy's cabinet met to decide on austerity measures to help meet a target of slashing the deficit to 4.4 percent of gross domestic product in 2012.

Spain is set to miss its target of reducing the public deficit from 9.3 percent of GDP in 2011 to 6.0 percent in 2012, with a final figure possibly topping 8.0 percent, the government says.

That overshoot could add another 20 billion euros to the required austerity measures, now estimated at 16.5 billion euros, according to the Popular Party government, which won power in November 20 elections.

Last week, the government announced budget amounting to 8.9 billion euros, and tax increases, including on salaries and on capital income, to bring in another 6.275 billion euros.

Spain's 17 autonomous regions, which are responsible for health and education services, were hard hit by the housing market crash and are a growing source of concern for economists and policy-makers.

De Guindos vowed to crack down on their spending.

The economy minister also said Spain's austerity programme will target the powerful regions, with a new law in March introducing strict control over their budgets.

"You will have a priori controls. Before approving the budget, ministers will need the green light from the central government," he said.

Moody's Investors Service warned last month that the regions will miss deficit-cutting targets for 2011 and could imperil Spanish efforts to curb the national deficit in 2012.

In Thursday's cabinet meeting, the ministers will be studying a future cut in the government services, likely slashing the number of governmental organisations, according to a report in El Pais. No decision was expected immediately, it said.

© 2012 AFP

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