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Spain to Keep Its Tools for Bank Cleanup, Defying Finland

June 13 (Bloomberg) -- Spain countered calls from Finland to use the European bailout to purge the financial system, saying it would continue to seek to prop up and restructure failing lenders.

Spain’s FROB bank-bailout fund, conduit for as much as 100 billion euros ($125 billion) of European funds, has bought preference shares, ordinary shares and contingent convertible securities in struggling banks. It has also seized failed lenders and restructured them before selling them at auction.

“For the future we should expect something very similar to what the FROB has already done to provide institutions with support,” Deputy Economy Minister Fernando Jimenez Latorre told reporters in Madrid today. Closing down banks isn’t a “probable option because it wouldn’t be the most efficient.”

His comments contrast with those of officials in Finland, one of the euro region’s six AAA rated nations. Prime Minister Jyrki Katainen said on June 11 that unhealthy banks should be “brought down” and some banks should be split up so that the viable parts can continue and the rest ends up in a so-called bad bank.

Spanish bank shares have declined since the rescue was announced on June 9. Banco Santander SA has lost 2.7 percent and Banco Popular Espanol SA fell 2.3 percent. Spain’s 10-year bond yield rose to 6.71 percent today after reaching a euro-era record yesterday.

Loan Conditions

Euro-region finance ministers said on June 9 that the aid will be tied to conditions that will be imposed on banks receiving aid, without giving details. Negotiations are continuing and Jimenez Latorre said he hopes the conditions will be fixed in the coming days.

Either the temporary European Financial Stability Facility or its permanent successor will be used, depending on when funds are needed and how soon the European Stability Mechanism comes into effect, Jimenez Latorre said.

“If there are needs in the short term and only one instrument is available because the ESM hasn’t yet been ratified by all member states, logically the existing fund will be used,” he said. “Once the transitory fund becomes permanent, we can use the other one: whatever funds are available will be used depending on the needs.”

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; 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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