Judy MacInnes: Bailout of Spanish savings bank may be first of many

THE weekend bailout of a small Spanish savings bank could be the first of several rescues before a mid-year deadline for struggling lenders, but the news does not imply new risks for Spain's financial system.

In a grim reminder of the problems dogging the largely unlisted savings banks, which are most exposed to Spain's property sector slump, the Bank of Spain said at the weekend that it had taken control of CajaSur after its planned merger with peer Unicaja failed.

The Bank of Spain will tap the government's Fund For Orderly Restructuring (FROB) to bolster CajaSur's balance sheet with an initial 550 million (472.7m), but the bailout could reach 2 billion, according to reports yesterday.

The Bank of Spain's move is a salutary warning to other savings banks that they also risk being taken over if they drag their heels over mergers ahead of the FROB expiry date of 30 June, said Santiago Carbo Valverde, an economic analysis professor at Granada University.

However, the rescue arrived at a bad time for the Spanish government, which last week announced a 15bn austerity package to repair public finances and jitters spread over Greece.

Investors fear that bank balance sheets in some eurozone countries could deteriorate to such an extent that the government will struggle to bail them out.

"We believe the intervention is quite negative news for the financial system, for the sovereign risk profile and for the economy in general," Credit Suisse analyst Santiago Lopez said in a note to clients.

Losses at the savings banks – known as cajas – could cost the state, via the FROB, 43bn, Morgan Stanley analysts estimated last month.

The news weighed on Spain's listed bank shares yesterday as concerns re-emerged over the health of the country's leading financial institutions still reeling from S&P's sovereign ratings downgrade last month.

At around noon yesterday, shares in Spain's biggest bank Santander fell 2.63 per cent to 8.37, while BBVA fell 2.91 per cent to 8.47.

However, analysts said the stability of Spain's financial system was not at risk.