Spain unveils major financial reforms

The government in Spain has announced a new set of financial reforms, particularly aimed at cleaning up the country's banking system, which is saddled with bad loans.

The government said it was determined to take the necessary measures to restore credibility and trust to the financial system.

It approved measures forcing banks to set aside a new 30 billion euro financial cushion on top of 54 billion euros ordered in February as insurance against bad loans on property.

The new rules also require banks to separate property assets from their balance sheets.

The Popular government of Mariano Rajoy took the sweeping action just two days after it effectively took over the fourth-biggest bank, Bankia, to salvage its balance sheet, bulging with losses.

Bankia had a 4.47 billion euro loan by the Spanish bailout fund converted into shares.

The government also ordered an independent audit on loans and property assets across the entire banking sector, as the European Union had asked.

Luis de Guindos, Spain's economy minister, said: "The government wants complete transparency, clarity is crucial to end any doubt about Spain's solvency."

Banks have until the end of the year to move their property holdings into asset-management firms for a fire-sale, Guindos said.

The banks will have to raise the money or borrow from the government at an annual interest rate of about 10%.

If banks have to go to the government to borrow money, the loans will be structured so that they could ultimately be converted into partial state ownership.

The government is now appointing independent auditors to value the banks' property assets.

A housing boom and bust has left many small lenders holding mortgage debt that may not be repaid.

The banks will also be forced to put some of their mortgage books into separate companies.

The government said it would also be liberalising rules for property rental to make it easier for the banks to sell their portfolios of property debt.

The Madrid stock market fell more than 3% after the reforms were announced.

Earlier, the European Commission had warned that "the necessary adjustment of bank balance sheets" would make it harder for individuals and businesses to borrow money, which would constrain the economy.

It predicted that the Spanish economy would contract by 1.8% in 2012 and by 0.3% in 2013.

The Commission also said that Spain's budget deficit would be 6.4% this year and 6.3% next year.

But Spain's economy minister Luis de Guindos said that the country would meet its target of a 5.3% deficit this year and 3% in 2013.

He added that the money to be loaned to banks would have no effect on the deficit.

The banking sector was cited by the ratings agency Standard & Poor's when it downgraded Spain's debt by two notches at the end of last month.

Figures from the Bank of Spain show that at the end of 2011, banks held 184 billion euros worth of problematic real estate assets, including loans and seized property, accounting for 60% of their property portfolios.