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BANKING SECTOR

‘Troika’ proposes extension to Spain bank bailout period

Financial system’s “risks remain elevated”

The European authorities and the IMF plan to recommend that Spain request an extension on the temporary bailout to clean up its banking system as a safeguard for the possible eventuality of future capital needs, European sources told EL PAÍS on Monday.

The bailout, which was granted in June 2012, ends on December 31 of this year. Spain has tapped 41.3 billion euros of the 100-billion-euro line of credit made available to it by its European partners. The government has ruled out asking for more money arguing that there are sufficient funds, while the Treasury can comfortably fund itself in the markets if the banks need more money and cannot obtain it elsewhere.

In its latest review of Spain's fulfillment of the bailout program, the European Commission, the European Central Bank and the IMF - the so-called troika - said "risks to the economy and hence to the financial sector remain elevated."

The comments were included in its third review of Spain’s compliance with the program after a visit to the country from May 21 to May 31 made by officials from the European Commission, the European Central Bank, the ESM and the European Banking Authority and the International Monetary Fund.

The troika noted that the Spanish financial markets have stabilized, while liquidity has improved, allowing a reduction in banks’ dependence on the ECB for funding. It also noted the recapitalization of the banks and the transfer of toxic assets related to the ailing real estate sector by banks to the Sareb asset-management corporation, or so-called bad bank. “On the basis of the review, it can be concluded that the program remains on track,” the troika said in a statement.

“Notwithstanding these welcome developments, given the adverse economic situation, continued deleveraging needs of the Spanish non-financial sector, and adjustment in the real estate market that continue to severely affect lending volumes and to impact the asset quality of the Spanish banking sector, a close monitoring of the system should continue in order to preserve the final stabilization of credit institutions,” the statement said.

The Bank of Spain recently tightened criteria governing the refinancing and restructuring of loans and their solvency classification, which could oblige lenders to increase provisions.

The next review is expected to take place in September 2013.

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