Spain's government is working on a second round of recapitalisation for its regional savings banks, in an attempt to ward off investor concerns that property-related losses in the sector could lead to an Ireland-style bail-out.
What are the possible options for Spain's 'cajas'?
GOVERNMENT INJECTING MORE CAPITAL
Chances: High
The government could issue a bond to recapitalise the banking sector. Analysts' estimates of how much capital the cajas need are wide-ranging, stretching from 17 billion to 120 billion euros ($162 billion).
Spain has been reluctant to raise capital in the debt markets to bail out the banking sector as it tries to clamp down on public debt at current high prices, although economists say it has room to borrow and and keep debt ratios manageable.
The government-backed fund (FROB) set up to help savings banks reduce their number to 17 from 45 had given out 10.6 billion euros as of December, the Bank of Spain said. Once disbursements from the fund pass 12 billion euros, the government will have to tap money markets.
Estimated average public debt to economic output ratios for 2013 are 14 percentage points below the euro area average, Barclays Capital says, and substantially below that of Ireland.
"The recapitalisation will have to be done, and to a large extent, be absorbed by the government," said Antonio Garcia Pascual, analyst at Barclays Capital. "Markets are worried Spain could be Ireland. We don't think it's the case, but unless you prove otherwise, they think the worst."
The Bank of Spain could then intervene in non-performing cajas, forcing mergers and shutting down the least viable.
Another option is for the government to pardon billions of euros in loans made to cajas under a 2008 liquidity plan in exchange for equity stakes, wrote Jose Carlos Diez, chief economist at Intermoney brokerage in Madrid.
RAISING PRIVATE MONEY
Chances: Low
Under new rules, the cajas may sell up half their equity to private investors — a key plank of a government plan to bring much-needed capital into a sector exposed to Spain's collapsed property market. But investors have yet to bite.
U.S. private equity firm J.C. Flowers has still to come through with a pledged investment in savings bank Banca Civica.
The cajas are planning a March roadshow to Asia to drum up investor interest, following similar trips to Europe and the United States, but have yet to strike any private sector deals. [ID:nLDE70H1KI]
Fund managers told Reuters in December cajas are a hard sell to foreign investors because of declining profit margins, poor quality assets and confusing post-merger management structures. [ID:nLDE6BI0F5]
RAISING MONEY INTERNALLY
Chances: Low
The cajas could sell off stakes in investments and restrict profits in order to recapitalise. Savings bank CatalunyaCaixa sold a 1.6 percent stake in oil major Repsol <REP.MC> for 450 million euros on Wednesday.
But analysts say the worst-performing cajas do not have sufficient assets to sell off to raise cash. And bank profit margins in Spain are plunging from rising levels of unpaid loans, increased provisioning and a deposit price war.
This means there is not much capital coming into businesses to use for recapitalisation. For a story on Spain readying a fresh bank funding plan
