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The Globe and Mail

EU approves second phase of Spain’s banking overhaul

Spaniards protest outside the National Court as they wait for the arrival of former IMF managing director Rodrigo Rato in Madrid, Dec. 20, 2012. Mr. Rato, a former deputy prime minister, was to answer questions over his stewardship of a major Spanish bank, Bankia, that had to be nationalized and bailed out for $24-billion (U.S.) earlier this year.

Daniel Ochoa De Olza/AP

The European Union has approved a cash injection of €1.87-billion ($2.5-billion U.S.) into four Spanish savings banks, the second phase of an overhaul of the country's banking sector.

In return for the funds, the four lenders, which ran into trouble when a decade-long property boom burst five years ago, will reduce their balance sheets by up to 40 per cent by 2017.

The plans include at least 4,000 job cuts, on top of the around of 8,000 already announced in the first phase of Spain's banking cleanup.

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The banks will have to refocus on retail and small business lending in their core regions and two of the banks – BMN and CEISS – will be nationalized. The other two, Caja 3 and Liberbank, will receive temporary aid through contingent convertible bonds, known as Cocos.

Spain has committed to sell CEISS and have BMN and Liberbank listed before 2017. Caja 3 will cease to exist as a standalone entity and will be integrated into bigger lender Ibercaja.

This will leave Spain's banking industry with about 12 entities compared to the more than 50 that existed before the financial crisis began in 2007.

"The restructuring plans of BMN, Caja3, Banco CEISS and Liberbank will make these banks viable again, thereby contributing to restoring a healthy financial sector in Spain, while minimizing the burden for the taxpayer," EU Competition Commissioner Joaquin Almunia said at a news conference.

An independent audit showed in September Spain's banking system needed around €60-billion to weather a serious downturn of the economy.

Spain has already received €39.5-billion of European funds to prop up nationalized lenders Bankia, CatalunyaBanc, Novagalicia Banco and Banco de Valencia and to set up a so-called "bad bank."

Separately, two banks – Banco Popular and Ibercaja – raised money by themselves to cover their needs, while seven out of the 14 lenders tested were considered by the audit to be well enough capitalized.

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Transfers of distressed property assets into the "bad bank" and losses imposed to shareholders and junior bondholders have reduced the final amount of public cash needed by around €20-billion.

The Bank of Spain on Thursday said junior bondholders in the four lenders would take haircuts ranging between 10 per cent to 75 per cent.

The rescued banks have also committed to sell a number of industrial stakes and subsidiaries and to limit the remunerations of the executives.

Liberbank, which has already sold its 5-per-cent stake in the gas operator Enagas, still has smaller stakes of 5 per cent in IT firm Indra and 6.1 per cent of the pulp company Ence.

BMN owns a stake in oil producer Deoleo.

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