Banks to cover cost of losses from rescuing Spain's 'cajas'

Economy Minister Elena Salgado on Thursday announced the country's three bank deposit guarantee funds, which protect savers' money up to a certain limit in the case of banks that go under, would be folded together and tapped to cover any losses deriving from the injection of public money into banks.

Salgado said this would avoid taxpayers having to foot the bill for the recapitalization of the banking system and would also prevent any widening of the public deficit.

The measure seems principally directed at the savings bank Caja del Mediterráneo (CAM), which was taken over by the Bank of Spain after it floundered under the weight of its exposure to the ailing property sector. The Orderly Bank Restructuring Fund (FROB), which operates under the umbrella of the central bank, injected 2.8 billion euros into CAM.

Bank of Spain governor Miguel Ángel Fernández Ordóñez warned last Friday that CAM could end up costing the state dear. "CAM is the worst of the worst, and I wouldn't rule out that in the case of CAM it will cost the taxpayer money," he said.

Salgado said Thursday that the intervention in CAM was an "exceptional" case that could not be compared with other banks that received funding from the FROB to meet the new solvency requirements because they were unable to raise it from private sources. She said it was too early to calculate possible losses from the injection of public funds.

The FROB injected a total of 7.551 billion euros into a number of banks to allow them to meet the new requirements.

Without availing itself of the deposit guarantee funds the 2.8 billion euros would have counted against the public deficit, making it even more difficult for the government to reach its objective of reducing the shortfall from 9.1 percent of GDP last year to 6.0 percent this year.

Salgado said the government was not contemplating any further measures to meet the target. "There are no additional measures on the horizon. Our commitment, our objective is to meet that six-percent figure, and I believe we are on the road to doing so," she said.

According to the Bank of Spain, the deposit guarantee fund of the commercial banks amounted to 3.144 billion euros at the end of last year, that of the savings banks 1.918 euros and that of the credit cooperatives 731 million euros for a combined total of 6.593 billion euros.

The government will need to change the law to be able to unify the three funds. This will be done by calling a Cabinet meeting shortly to approve a decree. Congress is closed ahead of the general elections due to be held on November 20, but the decree can be ratified by parliament's permanent committee.

Salgado said that after the restructuring of the savings bank sector, which has reduced the number of players to 15 from 45, it "no longer makes sense" to have three separate deposit guarantee funds. She said currently, apart from guaranteeing individual deposits up to 100,000 euros, the funds can also legally be tapped to strengthen the solvency of lenders in difficulty.

The minister said that injections by the banks into the three funds are currently below the maximum established by law, adding that she did not believe lenders will need to increase their contributions.