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Spain may create its version of NAMA

Monday, July 09 14:29:00

Spain will create a single 'bad bank' to house all its banks' soured assets similar to Ireland's NAMA and the banks will all increase their core capital buffers to 9 percent in return for up to E100 billion in European aid, a government source said today.

Euro zone leaders have promised to help Spain's banks, left laden with bad debts when a property bubble burst four years ago, after it became clear that with one in four workers out of a job the country could not manage the crisis without some form of outside help.

As government borrowing costs rose, the source said Spain - the biggest euro zone economy so far to request assistance - would sign a memorandum of understanding on Monday in Brussels to be followed on July 20 by a loan agreement, which would possibly be on 15-year terms at 3 to 4 percent interest.

The loans would be made to the state's banking rescue fund, the FROB, and counted as government debt, although Spain hopes that once a Europe-wide banking supervisor is formed the aid can go directly to the banks.

Currently only five of the country's biggest banks must reach a core capital level -- a measure of solvency -- of 9 percent this year. But in the memorandum, that requirement will be extended to the entire banking sector and must be reached next year.

Under the deal, to be agreed by euro zone finance ministers when they meet in Brussels on Monday, Spain will also recognise a division of its banks into four types, the source said. Three big banks do not need aid. Then there are nationalised banks such as Bankia, whose needs are already fairly clear; mid-tier banks that will be able to raise their own capital and won't need aid; and mid-tier banks whose aid needs will be defined after an audit of the sector is completed in the next two months.

Spain's government has already slashed the budget this year by some 45 billion euros ($55 billion), including tax hikes and spending cuts at both central and regional government level, but with the economy in recession and the tax take falling, it is struggling to reach its goal.

Spain's Economy Minister Luis de Guindos will also take to Brussels a package of budget cuts as the country struggles to reach its agreed deficit target of 5.3 percent of gross domestic product this year. He is expected to lay out new cuts worth some 10 billion euros this year and 30 billion euros next year at a meeting with European Union finance ministers on Tuesday, which follows Monday's narrower meeting.

In exchange, the European Union will give Spain until 2014 to reach a 3 percent deficit target originally set for 2013, diplomatic sources said.

A source close to the government, who has been briefed on the matter, said the package would include a hike in the value-added tax, reductions in social security payments made by companies, reductions of unemployment benefits, changes in calculations of pensions, cuts in benefits for public employees, layoffs of public employees, and the elimination of a tax benefit for the purchase of a primary residence.

Government officials on Monday began to prepare the public for tax hikes.

"If more VAT taxes were paid by those who should be paying it we wouldn't have to raise it so much. This debate over whether or not to raise VAT would not exist if there was not so much black economy," said Treasury Minister Cristobal Montoro at a conference, referring to tax fraud. (C ) Reuters