Spanish banking reform

Spain is contemplating pumping public money into its banks in a bid to save the financial sector from collapse, Prime Minister Mariano Rajoy said on Monday. In an interview for Onda Cero radio, he confirmed that a new banking reform plan would be adopted during a cabinet meeting on May 11.

Rajoy emphasized that using public money would only be a last resort. "If it were necessary to prompt lending, to save the Spanish financial system, I would not decline to do as all the countries in the European Union have done and inject public money," Rajoy argued.

Spanish banks were hit by huge losses after a decade-long property boom collapsed during the global financial crisis, leaving them with more than 180 billion euros ($230 billion) of toxic real estate assets.

The government in Madrid had already ordered Spanish banks to set aside 54 billion euros to protect against doubtful property-related assets. The envisaged reform of the banking system aims to get rid of a sizeable portion of those bad investments.

Bad bank to do good?

One option to do that would be to divert toxic assets into liquidation companies which would evaluate them and sell them off. But the creation of a so-called "bad bank" that would absorb doubtful investments is not off the table either, although Prime Minister Mariano Rajoy is not in favor of such a solution.

Government officials told Reuters news agency that a bad bank, which would shift risks away from commercial lenders to the government, could in place for a 10 to 15-year period.

However, Spain is under pressure from other eurozone nations to lower its deficit from 8.5 percent of gross domestic product (GDP) last year to 5.3 percent in 2012 and 3.0 percent in 2013. Rajoy insisted, though, that if any public resources had to go into banks, the move would not compromise tough deficit targets.

hg/gb (Reuters, AFP, dpa)