Spain plans partial nationalization of savings banks

MADRID (Reuters) - Spain plans a partial state takeover of its weakest savings banks as it seeks to reassure investors a rescue will not weigh on its deficit, sources and reports said on Friday.

A source familiar with the matter told Reuters the government will force debt-laden savings banks to become conventional banks and seek stock market listings to persuade skittish investors that they are good investments.

The state-backed bank restructuring fund (FROB) would then take stakes in the banks -- known as cajas -- which fail to attract private investment, the source said. Up to now the FROB has functioned as a lender to the cajas.

High levels of bad property loans at the savings banks is seen as a major risk for Spain's government as it aggressively cuts its budget deficit to stave off fears it will need an Irish or Greek-style rescue from the European Union and International Monetary Fund.

Estimates of the cost to recapitalize the savings banks range from 17 billion to 120 billion euros, with consensus falling in the 25 billion to 50 billion range.

Even in the absence of private investment into the weak regional lenders, economists say Spain could afford that level of rescue without seeking outside aid, which could take pressure of the euro zone aid fund the European Financial Stability Facility (EFSF).

Analysts say the EFSF could probably not cope with a full bailout of Spain without extending its scope.

"Nobody would like to invest in a caja now, but I think it's good that they try. You're talking about a process that will take two to three years (to float the cajas) but you have to start somewhere. What I think is good is that it starts to happen," said Arturo de Frias of Evolution Securities, who estimates a 50 billion euros hole needs plugging.

Even if the bulk of the bill eventually ended up back with the state, certainty about what it amounted to would help calm investor jitters about Spain's liabilities.

STEEP BORROWING COSTS

Spain's borrowing costs have soared over the past year on concerns that its high deficit and stagnant economy will force it to seek outside help, but a series of aggressive cost cuts and economic reforms have calmed fears somewhat.

The key spread between Spanish 10-year bonds yields and German bunds was around 218 basis points on Friday, down from just over 240 bps at the start of the week and a reflection of improving sentiment toward the euro zone periphery.

While most of Spain's financial system passed Europe-wide stress tests on banks last year, five cajas failed.

The Bank of Spain forced the cajas last year into a round of mergers, reducing their number to 17 from 45.

They must reveal by January 31 more details about their bad loans and property holdings they were left with after Spain's property bubble burst in 2008.

While some of the biggest cajas are seen as attractive investments, the smaller ones have had trouble drumming up investors interest on road shows. They plan a March trip to Asia, including China, following similar road shows in Europe and the United States.

Spain could change the law to make it easier for the savings banks to seek private investment, the FROB said in a statement on its website on Friday.

The aim would be to speed up the separation between their financial business and their social activities, the FROB said.

(Reporting by Manuel Maria Ruiz and Sonya Dowsett and Nigel Davies; Writing by Fiona Ortiz; editing by Mike Peacock)

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