NEWS FEATURE: Bank bail-out raises doubts about Spain's economy

Bank bail-out raises doubts about Spain's economyMadrid  - Spain could "continue being proud" of its financial system, Economy Minister Pedro Solbes said Monday, one day after the government announced its decision to bail out the savings bank Caja Castilla La Mancha (CCM).

It was the first such rescue in Spain during the global financial crisis, and made the government's constant reassurances about the solidity of the banking system ring increasingly hollow.

Despite top Spanish banks such as Santander buying foreign lenders and increasing their benefits, weaker banks could well be facing a painful period of crises and restructuring, analysts said.

The rescue of CCM was likely to be the first in a string of similar moves to salvage some of the savings banks which make up about half of the Spanish banking system, the daily El Mundo warned.

The government said it would back CCM with up to 9 billion euros (12 billion dollars) in guarantees of its liabilities.

The intervention only had a "relative significance," given that CCM represented 0.8 per cent of Spanish bank assets, Prime Minister Jose Luis Rodriguez Zapatero said.

Solbes said the bank was solvent and only suffered from "temporary" liquidity problems after making mistakes such as lending heavily to the construction and property sector before it went bust last year.

Clients could "calmly" leave their savings at the CCM, Solbes said, though some withdrew theirs on Monday.

Contrary to other European countries, Spain had not spent "a single cent in budget terms" on rescuing banks, giving them only loans and guarantees, Solbes explained.

The minister did, however, concede that no financial system was "immune" to the current problems.

Spanish lenders had long been protected by strict regulations contrary to high-risk investments, but they have now been hit hard by the collapse of the key housing sector.

Unemployment also stands at 14 per cent, the highest in the European Union, after the economy slipped officially into a recession late last year.

Soaring loan defaults affect especially savings banks, the assets of which are not as diversified as those of bigger lenders, and many of which were heavily dependent on the housing sector.

Savings banks have also suffered from being under the control of regional politicians instead of politically independent bankers, several editorials pointed out.

The CCM bail-out dealt a new blow to the government's economic credibility just as Zapatero was preparing to discuss strategies against the global crisis at the upcoming G20 summit in London.

It immediately affected investor confidence, eroding shares of the banking giants Santander and BBVA at the Madrid stock exchange.

The CCM case was the first time that the central bank mounted a major operation to rescue a bank since it took control of the much bigger Banesto in 1993.

The government has pledged to guarantee up to 100 billion euros in new bank debt to inject liquidity into struggling banks which cannot keep afloat through private deals.

The sudden rescue of CCM, after it failed to negotiate a merger with Unicaja, and the fact that its management was replaced made it seem that the government downplayed its problems, the economic newspaper Expansion said in an editorial.

"CCM is the first Spanish victim of the financial crisis, but probably not the last," the daily concluded. (dpa)

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