Spain Cabinet approves banking sector reform plan

MADRID — Spain’s new conservative government approved Friday a plan forcing banks to set aside an estimated (euro) 50 billion ($65 billion) in new provisions to cover toxic real estate assets, a bid to heal a sector that is critical to reviving the lame economy.

The Cabinet passed the plan a day after Economy Minister Luis de Guindos unveiled it, and it will be sent to Parliament for a yes-or-no vote with no amendments.

A key point is to force banks to be upfront about the value of their property assets. Their book value is widely seen as inflated following the collapse of a real construction boom, and this has spooked foreign investors, making it hard for Spanish banks to tap capital markets for money to lend to businesses and households.

The plan drastically raises the provisions banks must set aside for such holdings. So to avoid having to leave piles of money idle, banks will be under pressure to shed holdings such as land and foreclosed or unsold homes, and sell them at lower, market prices.

“With this set of measures, the fundamental idea is to boost confidence in our economy, strengthen the banking sector and its credibility in the national and international realm,” Deputy Prime Minister Soraya Saenz de Santamaria said after the Cabinet meeting.

The plan seems generally to have received a cautiously warm welcome. Economists warn, however, that it will not work overnight miracles in restructuring the banking sector or getting credit flowing again to the economy, which is expected to slip into recession this quarter and is saddled with a 22.9 percent unemployment rate.