By Julien Toyer and Jesús Aguado
MADRID (Reuters) - Spain's government tried to plug a gaping hole in the country's banking system on Friday, but the fourth such attempt to tackle the fallout from a property crash fell short of expectations.
The centre-right government offered high-interest loans to banks on the brink in a crisis which is shaking the euro zone, and ordered an independent audit of lending across the entire banking sector, as the European Union had asked.
"This is not the definitive clean-up framework that the market is clamoring for," said Nicholas Spiro from Spiro Sovereign Strategy. "Spanish bank restructuring is a moving target: the deeper the economic downturn, the greater the uncertainty about the size of the sector's provisioning needs."
Spain's troubled banks, with more than 184 billion euros ($238 billion) in problem loans and assets after the property bubble burst four years ago, lie at the core of the euro zone debt crisis due to fears that a massive rescue could push Spanish public finances to breaking point.
The immediate market reaction to Friday's government announcements was negative. But later the gap between yields on Spanish and German benchmark government bonds - a measure of how risky investors judge lending to Spain to be - narrowed somewhat to 450 basis points and Spanish bluechip shares moderated their fall to 0.76 percent.
Banks have until the end of the year to move their holdings of repossessed property into asset management firms for a fire sale, Economy Minister Luis de Guindos told a news conference. All banks must do this, he said.
A Spanish government source, however, later said that banks able to cover by themselves losses on their toxic property assets will not be forced to remove them from their books while it will be compulsory for those receiving public help.
The state will put less than 15 billion euros into the latest of the four separate bank rescues that Spain has enacted over the past three years, de Guindos estimated.
"The market was bracing itself for at least 50 billion euros in new cash. You can't put out a number as low as 15 billion without an explanation," said a London-based banking analyst who did not want to be named.
Spanish lenders must set aside 30 billion euros, on top of 54 billion euros ordered in February, as provisions against loans which are still performing as well as bad ones while defaults rise in an recession which has sent unemployment to 24 percent.
The Spanish government source said the 30-billion euro provisions would have an impact in capital of about 20 billion which, added to another estimated 20 billion euros to rescue systemic lender Bankia SA and other smaller banks would make up the figure investors viewed as necessary.
For banks unable to raise the funds, the government will provide five-year loans, convertible into shares with an interest rate double the rate on government bonds.
The state will have to raise money on debt markets for the loans to the banks, which will be made through an instrument known as contingent convertibles, or CoCos, which carry the risk that the state ends up with ownership of still-troubled banks.
The reform will foster credibility and build confidence in the financial sector, increase credit flow and lead to home sales at reasonable prices, said Deputy Prime Minister Soraya Saenz de Santamaria.
Rescue money for banks, crippled after a 10-year building bubble burst in 2007-2008, is a touchy subject in Spain where public spending cuts have eaten into education and health services.
A definitive clean-up of troubled banks, as well as early presentation of draft budgets for 2013 and 2014, are among reforms that could win Prime Minister Mariano Rajoy more time from the EU to hit tough deficit targets, euro zone officials told Reuters, although Spain says it is not asking for leniency.
The European Commission published new forecasts on Friday showing Madrid will have to make big additional savings this year and next to meet its promise of cutting the public deficit to 3 percent of national output in 2013. The EU executive said Spain would have deficits of 6.4 percent in 2012 and 6.3 percent next year unless policies change.
The government reiterated on Friday its aim to bring the shortfall down to 5.3 percent this year from 8.5 percent in 2011, saying that it has taken additional cost-cutting measures and tax hikes not included in the commission's outlook.
Rajoy has already reformed the banking sector once this year, in February, but his promises not to use public funds to bail out the banks made investors lose faith in the plan, which forced the banks to finance their own losses by selling assets and raising capital.
Under pressure from the International Monetary Fund and the European Central Bank, Rajoy backtracked and opened the door to public aid for the banks.
On Wednesday, the government took over Bankia, one of the country's biggest banks and sources say the state could inject about 10 billion into the lender, which is heavily exposed to the property market implosion.
De Guindos said the government would announce full plans for Bankia in a few weeks.
Home prices have been falling in Spain for four years, making it hard for the banks to sell off billions of euros of property that they repossessed from bankrupt builders.
To try to stimulate the moribund home sales market, the government also announced changes to rules on rental contracts and offered a 50-percent tax break on future profit for anyone who purchases a home this year, whenever they may sell it. ($1 = 0.7716 euros)
(Additional reporting by Manuel Ruiz, Sonya Dowsett and Paul Day; Writing by Fiona Ortiz; Editing David Stamp and Alastair Macdonald)