Business, Economics and Jobs

EU approves overhaul of Spain's troubled banks


A statue stands at the Kio Towers, headquarters of Bankia in Plaza de Castilla on June 9, 2012 in Madrid, Spain. Prime Minister Mariano Rajoy agreed with euro members Saturday on a 100 billion euro ($125 billion) infusion of capital for Spain’s financial sector.


Pablo Blazquez Dominguez

Spain's four nationalized banks face a major shakeup in order to be eligible for a €37 billion euro zone rescue package.

Bankia, NovaGalicia Banco, Catalunya Banc, and Banco de Valencia will have to layoff workers, impose losses on bondholders and halve their balance sheets in five years, reports Reuters.

The European Commission approved the plans on Wednesday, paving the way for a long term clean up of one of Europe's most troubled banking systems. 

The Commission said the restructuring of the banks "will allow them to become viable in the long-term without continued state support," reports the Telegraph. 

"Our objective is to restore the viability of banks receiving aid so that they are able to function without public support in the future," European Union Competition Commissioner Joaquin Almunia told Reuters. 

Lending in Spain is down sharply since the start of the banking crisis in 2007. It is now contracting at an annual rate of 5 percent. 

But The Wall Street Journal reports that many believe the strict cuts imposed on the banks will make the credit crunch worse. 

The four nationalized banks make up just about a fifth of Spain's banking sector. 

Bankia, Spain's second largest savings bank, was taken over by the government in May. As part of the agreement, will bow out of lending to property development and limit its presence in wholesale banking, reports the Wall Street Journal. The bank will now primarily lend to retail banks and small- and medium-size businesses.

It will lay off 6,000 workers, about 28 percent of its staff, and close 1,100 branches as part of the restructuring.

Bankia estimated that it would report a loss of €19 billion ($24.5 billion) this year, the largest in Spanish banking history, but expects to start making a profit next year. 

According to the Telegraph, the total cost of shoring up Spain’s banking sector has to date reached €67 billion ($86 billion).