Spain plans a partial state takeover of its weakest savings banks as it seeks to reassure investors a rescue will not weigh on its deficit, sources and reports said on Friday.
A source familiar with the matter told Reuters the government would force debt-laden regional savings banks to become conventional banks and seek stock market listings to persuade skittish investors that they are good investments.
The state-backed bank restructuring fund (FROB) would then take stakes in the banks - known as cajas - that fail to attract private investment, the source said.
Up to now the FROB has functioned as a lender to the cajas.
High levels of bad property loans at the cajas is seen as a major risk for Spain as it aggressively cuts its budget deficit to stave off fears it will need an Irish or Greek-style rescue from the European Union and International Monetary Fund.
Signs of greater transparency and a definitive plan for the banks sent Spain's 10-year benchmark bond to its highest price since early December and shares in Spain's biggest banks jumped to three-month highs.
"I think it's encouraging. One of the root causes of the lack of confidence in the euro area is the fear that Spain is the next Ireland," BNP Paribas chief euro zone economist Ken Wattret said.
Analysts' estimates of the cost of recapitalizing the savings banks range from €17-billion to €120-billion, with consensus falling in the €25-billion to €50-billion range, though Economy Minister Elena Salgado says it will be much lower.
If the clean-up costs around €50-billion to €60-billion and the government's plan is credible, "that's a net positive," Fitch debt rating agency's head of sovereign ratings said on Friday.
Even in the absence of private investment into the weak regional lenders, economists say Spain could afford that level of rescue without seeking outside aid, which could take pressure of the euro zone aid fund the European Financial Stability Facility (EFSF).
Analysts say the EFSF could probably not cope with a full bailout of Spain - covering all its debt obligations to mid-2013 - without extending the fund's scope.
Even if the bulk of the bank restructuring bill eventually ended up back with the state, certainty about what it amounted to would help calm investor jitters about Spain's liabilities.
The Bank of Spain forced the cajas last year into a round of mergers, reducing their number to 17 from 45. Five of them failed Europe-wide stress tests on banks last year.
They must reveal by Jan. 31 more details about their bad loans and property holdings. Only one caja has done so far, but once all the reports are in, the Bank of Spain will be able to give a clear idea of the total recapitalization needs.
Spain's borrowing costs have soared over the past year on concerns that its high deficit and stagnant economy will force it to seek outside help, but a series of aggressive cost cuts and economic reforms have already calmed fears somewhat.
A bank recapitalisation worth €50-billion amount to about 5 per cent of Spanish GDP, which could endanger the goal of cutting the budget deficit to 6 per cent of gross domestic product this year.
The FROB would have to raise debt on the market to purchase the bank stakes. In theory, the books would be balanced by the stakes in the savings banks to avoid a deficit impact, although the risk is those stakes dwindle in value.
Taking stakes in the banks "will increase the government's debt needs and that is one of the problems because we still don't know ... how much the cajas are going to need," said Josep Soler, general director of Financial Studies Institute.
The FROB would invest in the cajas at market rates subject to EU anti-trust approval, a government source told Reuters.
While some of the biggest cajas are seen as attractive investments, investors have shied away from smaller ones, notorious for being used by local politicians to fund pet projects from casinos to airports.
The cajas plan a March trip to Asia, including China, following similar road shows in Europe and the United States.
Spain could change the law to make it easier for the savings banks to seek private investment, the FROB said in a statement on its website on Friday.
The aim would be to speed up the separation between their financial business and their social activities, the FROB said.