Spain overhauled its banks for the fifth time in three years on Friday to secure up to 100 billion euros ($125 billion) in European aid for lenders crushed by bad loans from an extended property market crash.

MADRID — Spain overhauled its banks for the fifth time in three years on Friday to secure up to 100 billion euros ($125 billion) in European aid for lenders crushed by bad loans from an extended property market crash.

The government created a so-called bad bank to take over tens of billions of euros in defaulted loans and unsaleable property and to accelerate the clean-up of the banking sector, Economy Minister Luis de Guindos said.

Spain's banks are at the heart of the euro zone debt crisis, but the rescue has not cleared up doubts over the country's finances and the government is now under pressure to ask for a full sovereign bailout like Greece or Portugal.

The bad bank will begin operating in late November or early December, exist for between 10 and 15 years, and is intended to be profitable over that period so that Spanish taxpayers do not bear the burden of the bank rescue operation.

"The prices of these assets (that banks transfer to the bad bank) must ensure that the entity does not generate losses during its lifetime, something that is very important to minimize the impact on taxpayers," de Guindos told a news conference.

De Guindos also announced new rules for quicker and easier government takeovers of problem banks, a cut in pay for executives at banks that have been rescued by the state, and rules that will stop banks selling complex securities to unsophisticated investors.

Spain asked for a European rescue for its banks in June after it took over Bankia, a large lender that was particularly exposed to the property market, and found that it needed 19 billion euros to cover its losses.

De Guindos said Bankia could get emergency liquidity from the government before the European rescue funds are disbursed.

Spanish stocks rose after the bad bank news but bond prices slipped a little.

The IBEX blue-chips index extended gains to 2.8 percent in afternoon trade while the yield on Spain's benchmark 10-year bond rose to 6.76 percent from 6.73 before the announcement.


Despite the aid for the banks and an aggressive government drive to cut the public deficit, Spain's borrowing costs remain painfully high.

The economy is contracting and a quarter of workers are jobless, which means tax revenue is falling and this is undercutting the austerity drive.

The bad bank announcement came on the heels of data that showed investor confidence in Spain eroded in the first half of the year with 316 billion of euros of net capital outflow, up almost 70 percent in the last six months.

Over the last three years, Spain has already forced its banks to go through several rounds of consolidation and recapitalisation, then this year they were forced to recognise huge losses on real estate assets.

The bad bank takes the reform even deeper.

Private investors in rescued banks will bear some of the cost of the clean-up.

Holders of complex instruments known as preference shares will take a major hit, as the prices for those securities have fallen steeply.

Countries such as Sweden and Ireland have used bad bank structures to rescue their financial sectors, but the Spanish version is not modelled on any specific predecessor.

At least four Spanish banks, all of which have already been taken over by the government, are set to receive aid money under the rescue measures.

A number of other banks are also expected to need aid, though they will not be named until late September, after an independent audit by the big-four global accounting companies.

Banks will receive cash, government bonds or a stake in the bad bank in return for assets they transfer to the new entity, formally called an asset management company.

Banks that receive government debt in exchange for their toxic assets can use those bonds as collateral for liquidity from the European Central Bank, as rescued Irish banks did, de Guindos said.

The European Commission and the International Monetary Fund have approved the model being used for the bad bank, the minister said.

The bad bank will be financed by money from the FROB, Spain's bank-rescue fund, which will come from the European rescue funds; from private investors; and from debt it raises in the market, de Guindos said.

The amount of European rescue money that will go into the bad bank is low, he said.

The Bank of Spain will determine prices for assets transferred to the bad bank.

While they cannot be so low that they cripple already weak banks, they must be low enough so they can be sold at a profit at some point in the future.

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