Rajoy Says He May Use Public Funds to Clean Up Spanish Banks

Spanish Prime Minister Mariano Rajoy opened the door to using public funds to clean up Spanish lenders and said the government will pass a decree this week to bolster confidence in the banks.

“The last thing I want to do is lend public money, as has been done in the past, but if it were necessary to get the credit to save the Spanish banking system, I wouldn’t renounce that,” he said in an interview with radio station Onda Cero today. He didn’t give details on the decree that will be passed on May 11.

Spain’s government tightened provisioning rules in February to make banks recognize deeper real-estate losses and is now working on a plan to allow lenders to offload written-down assets into separate vehicles. Spain has tried to shield its public finances from the cost of cleaning up the banks and ruled last year that the industry would bear the cost of restructuring failed lenders.

Rajoy said the government hasn’t decided whether public funds will be used and in any case it wouldn’t affect the deficit, which is the third largest in the euro region. Using public funds would be a “last resort,” he said.

“I am not in favor of a bad bank,” Rajoy said. “The main aim of the decree is that there should be no doubts about the situation of Spanish banks.”

Rescue Fund

Spain’s previous government created the FROB bank-rescue fund in 2009, which bought preference shares and, in a second phase, ordinary shares in struggling lenders. As losses at the fund inflated the budget deficit last year, the former government ruled that any costs from the restructuring would be borne by the industry-financed Deposit Guarantee Fund.

Spanish Economy Minister Luis De Guindos said last week the plan to allow banks to hive off assets will be voluntary and each bank may set up its own vehicle. He said provisioning levels set in February of 80 percent for land and 65 percent for unfinished property were sufficient, allowing banks to offload the assets without generating additional losses.

The February decree requires banks to set aside 53.8 billion euros ($70.7 billion) in buffers and provisions this year, unless they win a later deadline by merging.

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