Spain To Nationalize Cajas

By: Emma Pinnock in Forex Consultant on Jan. 26, 2011

There was no rain in Spain on Friday as the country announced preliminary plans to nationalize certain savings banks, known as cajas.  The strategy is designed to bolster support for the banks and to derail a possible run on the nation’s struggling, debt-ridden savings banks.  Although the plan raises some serious issues, global markets and especially the troubled euro liked the news.  Coupled with a stronger than expected earnings report from General Electric, the FTSEeurofirst 300 index rose 0.8 percent.

The banking plan is Spain’s response to investors who feel an EU-IMF bailout is necessary.  The reality is that a bailout of Spain is not in the offing even if it becomes necessary.  The European Union and IMF are not in position to provide measures similar to those loans that Greece and Ireland received to the region’s second biggest economy.

In the plan, the government will drive the country’s most debt-ridden savings banks to pursue stock market listings and thus ease investor unrest.  Laws regulating the government’s central bank will be revised so that the government can purchase shares in these troubled institutions. 

Deputy minister Alfredo Perez Rubalcaba announced that reforms to the banking regulations were forthcoming.  It is believed these reforms will permit the central bank to acquire shares in the private banking sector on an as needed basis.  Poor real estate transactions have driven man of the country’s savings banks, known as cajas, to the brink. 

Restructuring the financial institutions is seen as one of several measures needed to keep the country from becoming bailout bait.  The other steps will be fashioned in the country’s drastically demanding austerity cuts, moves that have already created civil unrest.

The promise of new transparent reform to the country’s banking institutions had an immediate impact on the 10-year benchmark.  The 10-year bonds rose to their highest level since December 1st and the country’s largest banks rose to the highest levels since November 1, 2010.

Market experts have estimated the cost of nationalizing the cajas will run anywhere for 17 billion to 120 billion euros.  The most common projection is in the 25 to 50 billion euro range.  However, Spain’s Economy Minister, Elena Salgado, said the cost would be lower.

Final details about the nationalization plan have not been settled. If the cost is in the50 billion euro range, it is believed the government could muster the resource without seeking aid from the EU.  Of course the amount of money raised through the public offerings is key to the plan. 

Last year, the central bank forced the merger of 28 banks and reducing the number of cajas from 45 to 17.  All Spain’s banks are required to submit their assets and liabilities by January 31, 2011. 

With the rise in Spain’s borrowing costs, the Socialist Prime Minister, Jose Luis Rodriquez Zapetero announced and began to implement strict cost cutting measures.  Zapetero’s ambitious austerity plan is tailored to reduce the national deficit to 6 percent of GDP by the end of the year.

The final plan requires approval by the European Union’s anti-trust committee.

Similar Posts:

Share

Post comment