Economy Minister Luis de Guindos said late yesterday that banks have a year to make 50 billion euros ($66 billion) of provisions against real-estate assets. If they agree by the end of May to merge, they get a further 12 months to take the charges and can tap the state’s bank-bailout facility for funds.

Prime Minister Mariano Rajoy, in power since December, is trying to restore the flow of credit to Spain’s shrinking economy and improve confidence in lenders saddled with 175 billion euros of troubled real-estate assets. The government wants to remove doubts about the way assets are valued to enhance banks’ access to financing while shrinking the oversized industry.

“By improving the transparency and the perception of strength of Spanish banks, they will be able to finance themselves better, and that is going to allow them to make loans,” de Guindos said in Madrid.

The government will make banks increase the ratio of provisions set aside for urban and rural land to 80 percent from 31 percent, de Guindos said. For unfinished developments, the provisioning level will rise to 65 percent from 27 percent and to 35 percent for other so-called “troubled” assets including finished developments and houses.

‘Zombies’

“The banks are going to argue that they don’t have enough time but the government is right to force them because there are some zombies out there,” Inigo Lecubarri, who helps manage about $300 million at Abaco Financials Fund in London, said in a phone interview. “There’s no question that this is going to be burdensome for the banks but frankly they’ve had plenty of time already and we need to get some action here.”

The 50 billion euros in increased real estate charges for banks will be in the form of 25 billion euros of provisions to be taken against earnings, the economy ministry said. Banks that merge can take the provisions against capital instead of profits.

Another 15 billion euros will be in the form of making banks build a capital “buffer” for land and unfinished developments. The remaining 10 billion euros will come from a 7 percent provision against healthy developer loans, charged against earnings.

De Guindos said the plan won’t affect the budget deficit, which the government is trying to narrow with measures including wage freezes and tax hikes. Still, the Treasury will sell debt to increase the equity of the bank-bailout fund, known as the FROB, to 15 billion euros from 9 billion euros.

CoCo Sales

Banks that agree to merge will be able to sell contingent convertible bonds to the FROB, de Guindos said. The bonds, known as CoCos, convert into equity if capital ratios fall below a certain level. Bonds issued by the FROB, which has the capacity to sell 90 billion euros of debt, counts as Spanish public borrowing.

“It looks to me like a lot of stick and not very much carrot -- these are tough rules that are going to cause a lot of distress in the banking industry,” said Ricardo Wehrhahn, a partner at Roland Berger Strategy Consultants in Madrid. “The danger is that banks will be under pressure to seek mergers just to gain some time instead of doing so for sound business or economic reasons.”

As part of the 175 billion euros in so-called troubled real estate assets, banks have about 88 billion euros in land or unfinished developments that has average provision coverage of 31 percent, the ministry said. Provisions have been set aside to cover 27 percent of the remaining 87 billion euros of that total.

New Charges

The 50 billion euros in new charges compares with 66 billion euros of provisions taken by banks between 2008 and June 2011 to cover specific loan risks, according to the ministry. CaixaBank SA (CABK) Chairman Isidro Faine estimates banks in Spain generated pre-provision income of 24 billion euros in 2011.

The former Socialist government’s first initiative to help banks was to create the FROB in 2009, which spent about 10 billion euros buying preference shares in lenders it encouraged to merge. In a second phase, the government bought ordinary shares in struggling lenders last year.

Rajoy, who leads the pro-business People’s Party, had considered creating a so-called bad bank to buy toxic real- estate assets from lenders, two people familiar with the situation said in November. A bad bank may have clashed with Rajoy’s election pledge not to spend taxpayers’ money cleaning up lenders. Rajoy and Guindos have also ruled out using the euro region’s bailout funds to finance the overhaul.

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

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

http://www.bloomberg.com/news/2012-02-03/spain-coaxes-banks-to-merge-as-extra-time-given-to-purge-losses.html

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