Convertible bonds to count as capital, minister believes

Economy Minister Elena Salgado said Monday she was confident that convertible bonds issued by Spanish banks will be included as capital in the new solvency requirements the European Union plans to impose.

"It appears that this is going to be the case; it's quite logical" given that the bonds will be converted into shares, Salgado said in an interview with state radio RNE.

The EU is planning to require banks to have a minimum core capital ratio of 9 percent. Banks in Spain currently need a ratio of 8 percent and 10 percent in the case of unlisted lenders.

Spain's main banks are confident they can meet the new ratio without having to overly tap the markets. Santander, BBVA, La Caixa and Banco Popular calculate that the impact of pricing government bonds they hold at their current market value will be around 3 billion euros.

They believe retained earnings, divestments, a reduction in assets and the inclusion of convertible bonds in calculating capital will mean they will scarcely have to go to the markets to meet the new solvency requirements.

If the European Banking Authority (EBA) also allows generic provisions to be included as capital, Spain's big banks will be in an even more comfortable situation. Neither convertible bonds nor pro-cyclical provisions counted as capital in the stress tests carried out on European lenders in July.

Salgado acknowledged that the current tensions in the financial markets require banks to boost their capital. However, she said it is still not clear if the core ratio will be raised to 9 percent, adding that it did not make sense to set the level until it has been decided what to do with Greece. The minister said she was in agreement with proposals to introduce a haircut in the value of outstanding Greek debt that make the country's debt burden more sustainable.

She reminded banks that if they require state funding to meet the new solvency requirements, they will be subject to limitations on paying dividends and bonuses to their management.

Salgado welcomed remarks by French President Nicolas Sarkozy during the EU summit over the weekend that Spain was "no longer in the front line" of the euro-zone sovereign debt crisis in reining in its deficit. "The task has not been completed yet, but Sarkozy has said that we have done a lot and that we have distanced ourselves from that first line of problems," she said.

Sarkozy's comments contrasted with earlier remarks over the weekend by German Chancellor Angela Merkel who said Spain needed to do more to regain the confidence of the financial markets. That sparked a response from the government, which said it had already taken measures to make sure it meets its target of reducing the deficit this year to 6 percent of GDP from 9.2 percent. The government said it had built up a cushion of 7.65 billion euros to offset any deviation on the part of the regions which been set a deficit target of 1.3 percent of GDP.

In response to comments by the opposition Popular Party's spokesman on economic affairs, Cristóbal Montoro, that the situation in Spain is "very serious," Salgado said: "It's true that there are many things to do. It's true, in fact even more true, that we have done many things, and that we're getting results recognized globally, and it is surprising that on the part of the PP, and particularly Mr Montoro, the only thing we get are catastrophic messages."