Salgado's 'nightmares' over as Spain tackles banks

Spanish Finance Minister Elena Salgado’s ‘worst nightmares’ ended with the European Union’s $925 billion plan to backstop euro-region debt. Now, she’s focussing on overhauling the country’s savings banks and labour rules to shore up the economy.

“In my worst nightmares, I was worried that we wouldn’t be able to put in place a stabilisation mechanism, but we now have that,” Salgado said in an interview yesterday at the Finance Ministry in Madrid. “I don’t have nightmares anymore.”

Greece’s near default pushed the yield premium on debt of high-deficit countries such as Spain to a euro-era high last month, before the May 10 announcement of the EU backstop reversed much of the declines. Now, concern that more Spanish savings banks will need bailouts and that the government may struggle to pass its budget is weighing on bonds, even after Salgado crafted the deepest budget cuts in three decades.

The government is backing a series of mergers among savings banks to be completed this month. Around 20 of the regional lenders will remain at the end of the process, Salgado said. That compared with 45 before the decade-long housing boom collapsed, sparking an almost two-year recession and a surge in bad loans that has hobbled the lenders known as cajas.

After the seizure on May 22 of savings bank CajaSur, which accounted for 0.6 per cent of the banking industry’s assets, Salgado said no more lenders need intervention by the Bank of Spain. The cost of restructuring the savings-bank industry wouldn’t be much more than the $15 billion that the state-backed rescue fund, known as FROB, has already raised, she said.

“I don’t think the new FROB issuances are going to be very significant,” she added. “At the end of June we are going to have a more solvent and robust financial system.”

A change of the law governing savings banks, whose managers tend to be appointed by regional governments, will allow the lenders to raise funds on capital markets. Still, the government wants to ‘preserve the key elements’ of the mission of the savings banks which in 2008 spent more than $ 2.5 billion on social programmes.

In an attempt to bring down an unemployment rate of around 20 per cent, which rises above 40 per cent among young people, the Socialist government is also planning to change labour rules to bridge a divide between long-term workers with some of the best protection in Europe and the 24 per cent of the workforce on temporary contracts. The plan also aims to provide more ‘internal flexibility’ to companies and workers.