Spain Bails Out First Bank of Financial Crisis

The Bank of Spain will bail out regional savings bank Caja Castilla la Mancha, the government said on Sunday, as a slumping property market forced the first banking rescue in Spain since the financial crisis began.

The Bank of Spain, which will take over the running of CCM, will provide funds to help the bank backed by up to 9 billion euros ($12.06 billion) in government guarantees, Economy Minister Pedro Solbes told a news conference, adding that he hoped the final aid bill would be a fraction of that.

"The Spanish financial system is enormously solid," Solbes said, calling CCM's problems an isolated liquidity problem and promising that the bank would meet all its obligations to creditors and depositors.

But he refused to guarantee a trouble-free future for Spain's banks if the world financial crisis persists, particularly its regional savings banks that are heavily exposed to property developers struggling during a deep recession.

"I feel pretty relaxed about the savings banks. Are they totally immune in the long term? If we keep having the liquidity problems we are seeing now I don't think anyone can say that," he said, as CCM joined a long list of banks on both sides of the Atlantic that have had to be rescued or nationalized.

The latest bad financial news comes as financial markets await the outcome of Thursday's meeting of G20 leaders in London to address the economic and financial crisis.

The Spanish government has already said it would guarantee up to 100 billion euros in new bank debt to assist institutions with liquidity problems.

But until now, Spain's government had been able to boast that its banking system had avoided any bank, due to regulations that prevented them from investing in complex mortgage-backed securities.

But many banks are highly exposed to a property market that is rapidly collapsing, pushing up their non-performing loans.

Private Solution Failed

Unlisted savings banks with close links to regional governments, like CCM, have long been spoken of as being most likely to succumb to trouble.

The government had first hoped that CCM, which is heavily exposed to property developers in its central Spanish region, would be able to solve its problems via a merger with Andalusia-based Unicaja, together with help from the Deposit Guarantee Fund, Solbes said.

CNBC.com

The Bank of Spain will start by seeing if it can sort out CCM's problems with an initial injection of 2 billion to 3 billion euros, he said.

The Bank of Spain decided to replace CCM's board on Saturday, in a decision not made public until Sunday, when the bank's chairman was summoned to the Bank of Spain, officials said.

CCM's non-performing loan ratio was about 5 percent at the end of 2008, sources close to the bank said.

The bank had assets of 24.5 billion euros ($32.84 billion) at the end of 2007, together with 582 branches and almost 3,000 employees, according to its annual report.

This will be the first time the Bank of Spain has taken over a Spanish bank since Banesto in 1993.

The Spanish economy slid into recession in the second half of 2008, after a decade of boom based on property and ballooning private debt, which coincided with a current account deficit second only to that of the United States in dollar terms.

Unemployment has already almost doubled to 15 percent and the government has launched a 70 billion euro fiscal stimulus program, which will push the fiscal deficit to almost 6 percent of gross domestic product this year.

The government has said that any banks in trouble should first look to the Deposit Guarantee Fund, which has about 7.2 billion euros ($9.65 billion) in funds and is financed by banks.

If this money is insufficient for any troubled bank the government has said it could be willing to provide more funds.

• Slideshow: Companies at Greatest Risk for Default

Copyright 2009 Reuters. Click for restrictions.