Debts & Loans

Spain has no plans to inject public money into its banking system and will first rely on a private fund for possible interventions, Spanish deputy economy minister David Vegara said on Wednesday.

The case in point is a proposed merger of regional savings banks Unicaja and the smaller Caja Castilla de La Mancha which should draw on Spain's privately-financed Deposit Guarantee Fund (FGD) if necessary, Vegara told Reuters.

The comments followed media speculation the government was planning to help the deposit fund bail out the banks, in what would have been Spain's first state bailout of the crisis.

"The banks have started work analysing their needs, and if they need to, well they will speak to the FGD," said Vegara of Unicaja and CCM. "This is the first thing that has to be used, among other things, because you don't have to use public funds."

Spain's banking system has gone for 20 months without rescues or nationalisations but faces spiralling debt defaults as unemployment rises faster than in any other developed country after the collapse of housing and credit booms.

Spanish banks have been shielded from the crisis through conservative investment policies, a focus on retail banking and strict Bank of Spain reserve requirements.

"The Spanish system has shown its strength but is not immune from events going on around us each week," said Vegara, 42, a former economics professor and private sector economist who is tipped to succeed Economy Minister Pedro Solbes.

Spain's deposit scheme, built up from bank contributions, protects citizen's deposits and can provide loans to resolve capital and liquidity problems at banks.

With 7.2 billion euros in funds, it holds 40 percent of all bank deposit guarantees in Europe, according to the government. Vegara said it was too early to say when the fund might be exhausted and when public funds would be needed.

"We haven't even started to use it (the FGD), it hasn't been used since 1996. To start to think about when it will run out is a bit premature," Vegara said.
"It has to be our first response."

But he left the door open for state recapitalisations further down the line. "The government has said we want to be ready if it is necessary. This is not a forecast it will be necessary but the legal framework is there," he said.

RECESSION

Vegara said Spain was already suffering the worst period of the crisis and expected first quarter GDP to decline at a similar rate to that of the final three months of 2008.

He saw pressure on government 2009 and 2010 growth forecasts but expected an economic recovery by early next year. "Things haven't got better in terms of expectations," Vegara said. "One has to be confident of the capacities of European economies to recover by the end of this year and the start of the next."

Asked about U.S. calls for an expansion of fiscal stimulus plans, he said states should first make existing packages work. "The key word is implementation, and that's where we should concentrate our efforts in the months to come," he said. He saw an improvement in investor sentiment towards Spanish sovereign debt after the spread on Spain's 10-year bond hit a record 130 basis points over the benchmark German debt last month.

"What you've seen in the past weeks is shrinkage of these levels of 130 to levels lower than that. I think the market is reacting to the situation, in the sense we've come from a point where discrimination amongst risks was basically nil, now there is a lot of discrimination," he said. He saw no solvency problems among euro zone countries. But in such an event, Vegara said a member state should put its own accounts in order before relying on help.

"There is solidarity. But always the first step is for the country that might have difficulties. Obviously, if it has to carry out certain tasks, it will have to do that," he said.

Nor did Vegara see a pressing need for creation of a common Eurobond to help cut widening spread differentials among countries. "Governments and treasuries in general in Europe, from what we can see, obviously with very different spread levels in some countries and very high in a couple of cases, are placing their paper reasonably well," Vegara said.

But he said Spain would be open to discussing coordination of debt issuance.

"Would Spain be open to discussing coordinated policy? I think we have given enough signals that we're not afraid to say we're a member of the EU and euro zone, that we trust in and believe in coordination and joint action," Vegara said. Asked about speculation Solbes would step down in an April cabinet reshuffle, Vegara said there was no talk of such a move. Earlier on Wednesday Solbes said he wanted to stay in the job. "He was very clear, there is no discussion," Vegara said.