*Spain to bail out its banks

The Spanish government is set to launch a sweeping restructuring of its troubled regional savings banks in an attempt to reassure global markets it can sort out the problems caused by its troubled property sector.

The authorities plan to create a state-backed fund which will enable Spain’s regional banks (Cajas) to raise capital in return for an equity stake. The move allows for a part-nationalisation of up to 17 of the country’s regional banks with investment also coming from private sources.

One of the reasons the Cajas need money is to help them come clean on losses caused by suspect real estate loans. To write off the debts, the banks need extra investment to maintain their liquidity ratios (the percentage of their balance sheets they must legally keep in cash).

In addition to the offer of government money, the Cajas are seeking investment on a tour of the Far East in the hope of raising funds from Japan, Singapore and China.

Euro on trial

The timing of the Spanish government’s move is a not a coincidence. Spain must shore up market confidence in the run up to the Spring, when it needs to refinance a large swathe of its debts on international markets.

If it fails to refinance at a reasonable rate of interest, the government could be forced to follow Ireland and Greece in asking for a bailout.

As Spain is a much larger economy than either Greece or Ireland, the money needed would likely exceed that available in the earmarked bailout fund.

The result could trigger a euro collapse or at least precipitate the formation of second tier, weaker Euro.

The short-term instability would be terrible for overseas property transaction volumes across Europe in the short-term but would kick-start business over a longer time period

All eyes on Spain.

Source: Global edge

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