Spain commissions banking sector audit

MADRID - Reuters

Spain’s Prime Minister Mariano Rajoy reacts during a news conference, May 9. Rajoy’s government is under pressure to displ concerns about the banking sector. REUTERS photo

Spain agreed to commission an independent audit of its financial system on May 11, trying to dispel market concerns that a state-funded bank bailout, set to be approved by the cabinet, could strain public finances to breaking point.

At its weekly cabinet meeting, the government was to adopt a plan to force banks to park their toxic real estate assets in holding companies that would later sell them off, a move that could deepen losses for the lenders.

It was also expected to demand banks set aside a further 35 billion euros ($45 billion) to cover sound loans in their real estate portfolios. The government has already obliged banks to make provisions of 54 billion euros to cover bad assets.

A definitive clean-up of troubled banks, as well as an accelerated 2014 budget, are among reforms that could win centre-right Prime Minister Mariano Rajoy more time from the European Union to hit tough deficit targets, EU sources told Reuters, although Spain says it is not asking for leniency.

The European Commission published new forecasts on May 11 showing Madrid will have to make big additional savings this year and next to meet its promise to cut the public deficit to 3 percent of national output in 2013.

The EU executive said Spain would have a deficit of 6.4 percent in 2012 and 6.3 percent next year unless policies change. The government has vowed to bring the shortfall down to 5.3 percent this year from 8.5 percent in 2011.

European Union Economic Affairs Commissioner Olli Rehn said the 17-nation eurozone was currently in a “mild by short-lived recession” and would see a “slow and subdued recovery” at the start of the second half of the year.

Economic activity is estimated to have contracted in the first quarter of 2012 after shrinking at the end of last year, officially putting the eurozone in recession, the commission said.

The eurozone’s economy is forecast to shrink by 0.3 percent this year but grow by 1.0 percent in 2013.