De Guindos Says Bailout Fund to Manage Spain Bank Restructuring

Spain will put its bank rescue fund in charge of the bad assets separated out from the nation’s struggling lenders that are receiving a European bailout.

The FROB fund will be the main shareholder in a so-called bad bank, according to a proposal that will be approved by the Cabinet on Aug. 24, Economy Minister Luis de Guindos told the Efe news agency in an interview today.

All the banks receiving loans from European rescue funds will have to transfer their non-performing assets to the bad bank, he said. The comments were confirmed by a Spanish official, who asked not be identified, citing government policy.

Prime Minister Mariano Rajoy is struggling to avoid a second bailout after his government signed off on 100 billion euros ($123 billion) of loans from EU rescue funds on July 24 to recapitalize banks amid its second recession since 2009 and surging borrowing costs.

Spain’s benchmark 10-year bond yield closed at 6.44 percent on Aug. 17, falling 76 basis points since European Central Bank President Mario Draghi said on Aug. 2 that the bank would buy sovereign bonds to bring down yields if countries applied for similar support from Europe’s rescue fund and accepted strict conditions in return.

Preferred Shares

Spain will also approve rules to restrict the sale of preferred shares on Aug. 24 to prevent repeating past errors, de Guindos said. Savings banks such as the nation’s third-largest lender, Bankia group, in 2009 resorted to selling preferred stock to retail clients through branch networks after debt markets dried up.

New issues will have to have an institutional participation of at least 50 percent and have the same conditions as those set for retail clients, de Guindos said. In the case of non-listed entities, there will be a fixed minimum sales amount of 100,000 euros.

Preferred shareholders, unlike depositors, aren’t insured by the government against losses. As many as 686,296 retail investors held about 22.5 billion euros of preferred shares sold by banks as of May 2011, according to Spain’s stock market regulator, known as CNMV.

Holders must also under European Union rules share the burden of rescuing cash-strapped lenders to reduce taxpayers’ contribution to the 100 billion-euro bailout of Spain’s banking system.

Bankia’s preferreds, which were issued by the Caja Madrid savings bank in 2009, last traded at 45 percent of face value on July 11, according to the Bolsas y Mercados Espanoles SA stock exchange.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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