Spain's new centre-right government ruled out a bad bank to deal with toxic property assets, wary of adding more debt to a nation fighting to control its deficit and putting the onus on lenders to make their own provisions.
Ring-fencing property assets at a state level was never on the government's agenda, said Deputy Prime Minister Soraya Saenz de Santamaria at a press conference after the weekly cabinet meeting on Thursday.
Economy Minister Luis de Guindos said in a Financial Times interview that he expected banks to set aside up to 50 billion euros (41.3 billion pounds) in extra provisions to cover toxic real estate assets built up over a decade-long housing boom.
The majority of banks can achieve this by retaining earnings, and will get several years to do so, he said, a move that would restrict banks' earnings growth.
Spain is loath to bail out its banks, saddled with billions of euros of unsold property and loans to bankrupt property developers, as this would force a sharp jump in national debt, further damaging euro zone sentiment.
Analysts and one banking source said the move seemed to be very similar to what the last government proposed -- that is putting the onus on the banks to come up with provisions to cover for toxic assets rather than pumping in state funds.
It appears to be a pretty similar process to that carried out up to now by the Bank of Spain, said Jose Carlos Diez, chief economist at Madrid-based brokerage Intermoney Valores.
A London-based analyst agreed. They're just going back to the last government's stance, they don't want to raise capital.
CURBED EARNINGS GROWTH
Ireland's bad bank, NAMA, created in 2009 to relieve banks of unsaleable property after a housing bubble burst triggered a huge capital hole which the government had to fill.
Although Spain's public debt ratio is lower than that of France or Germany, the state deficit is expected to reach 8.2 percent in 2011, overshooting the 6 percent target.
Setting up a bad bank could bump up the public debt ratio to uncomfortable levels. Bailing out the Irish banks quadrupled Ireland's debt-to-gross domestic product (GDP) ratio.
The extra provisions over five years would be a sensible move to reassure investors that the real estate problem was being addressed, said Neil Smith, analyst at WestLB.
The crucial point is they will be provisions taken over a number of years. The authorities, the government and regulators in Spain don't want to completely choke off the economy by killing the banks and making it difficult for them to lend, he said.
The Bank of Spain has required banks, including Santander
As the domestic economy has worsened and the value of assets has deteriorated, the Bank of Spain was expected to tell banks the provision needed to be about 50 percent.
The comments by de Guindos indicate the provision will be nearer 58 percent.
Royal Bank of Canada estimated that 50 billion euros was equivalent to around two years of pre-provision earnings leading to around four to five years of limited earnings growth depending on the speed of loss recognition.
(Additional reporting by Jesus Aguado and Andres Gonzalez in Madrid; Editing by Erica Billingham)