Spain's second-biggest savings bank Caja Madrid has asked for up to 3 billion euros ($3.7 billion) from a government rescue fund set up to promote mergers among the country's network of unlisted savings banks, a source close to the company said on Tuesday.
The government has set a June 30 deadline to tap money from the Fund for Orderly Bank Restructuring [FROB].
It wants the bigger savings banks to absorb the smaller, weaker ones after the sector's credit quality declined sharply due to heavy exposure to the country's property boom and bust.
Caja Madrid, in merger talks with regional savings banks Caja Avila, Caja Insular de Canarias, Caixa Laietana, Caja Segovia and Caja Rioja, declined to comment.
Increased demand for support could result in needs for further funding by the FROB, leading to the fund seeking capital markets support in the short term, Barclays Capital said in a recent note.
Fitch Ratings on Tuesday downgraded FROB debt to AA+ from AAA following its similar downgrade of Spanish government debt on Friday.
The fund is capitalized with 9 billion euros, of which 6.75 billion euros have been charged to the budget in 2009 and 2.25 billion euros have been contributed by the banks themselves to a Deposit Guarantee Fund.
FROB may also fund itself on the capital markets but external funding is limited to the sum of 10 times the funding available at any time.
This equals a maximum of 90 billion euros, according to Barclays Capital.
FROB has only made one benchmark issuance outstanding to date — a 3-billion-euro, 5-year bond issued on Nov. 12.
Following the Fitch downgrade on Friday, Spanish 10-year bond spreads widened by more than 10 points from the open on Tuesday against the German benchmark. Spanish 5-year credit default swaps widened to 245.5 basis points against 218.8 basis points at New York close on Friday.
The government wants to complete the overhaul by the end of this month, with Spanish commentators expecting the network of 'cajas' to shrink to around 20.
The Bank of Spain took over CajaSur, a small, 146-year-old ailing lender controlled by the Catholic Church, on May 22, a warning to other savings banks delaying mergers.
The Bank of Spain has proposed new rules aimed at forcing Spanish banks, who are owed over 300 billion euros by property developers, to take the hit for bad loans sooner.
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