HispanicBusiness

Spain has announced a drastic reform forcing banks to set aside a new 30bn euro ($39bn) financial cushion and also asked banks to separate property assets from their balance sheets.

The government of Mariano Rajoy, the Spanish prime minister, took the sweeping action on Friday, just two days after it effectively took over the fourth-biggest bank, Bankia, to salvage its balance sheet dripping in red ink.

The country will charge two independent auditing firms with valuing banks' exposure to the collapsed property sector, ministers said after a cabinet meeting.

"The government wants complete transparency, clarity is crucial to end any doubt about Spain's solvency," Luis de Guindos, the economy minister, said.

The government had already forced banks to make provisions of 54bn euros to cover bad assets.

However, the government action to clean-up of its banks seem to have failed to boost the stocks.

Madrid's IBEX-35 index of leading shares plunged 3.32 per cent to 6,811.6 points, dragged down by plummeting values for even the strongest banks.

Santander, the eurozone's biggest bank by assets, slumped 5.18 per cent to 4.665 euros; Spanish number-two BBVA dropped 5.84 per cent to 5.00 euros; and Bankia skidded 3.37 per cent to 2.034 euros.

Bankia, in which the state is taking a 45-percent stake as a crisis measure to save it from crippling bad loans, had 37.5 billion euros in exposure to the property sector at the end of 2011.

Al Jazeera's Sonia Gallego, reporting from Madrid, said the nationalisation of other banks should not be ruled out as an option yet.

"With the gravity of the economic situation [in Spain], it is getting increasingly difficult" for the government to refinance as much of the debt as it can, she said.

Toxic assets

Spain's banks were hit by billions of euros of losses after a decade-long property bubble burst in 2008 and concerns about them, and the country's overspending regional governments have fanned fears of a new eurozone debt crisis.

Toxic assets now total 184 billion euros, but many fear the hole is even bigger. Successive waves of bank sector clean-ups have failed to convince investors.

Our correspondent said that the toxic assets are a result of a property bubble experienced in Spain before the recession.

"As a result, with the recession, so many people were left unable to pay for their mortgages, and the banks are left to deal with the after-effects."

"It's not the fault of the people who bought their homes with mortgages that they might not have been able to afford. It's the fault of the politicians and those making bad lending decisions with our economy," a local man told Al Jazeera in Madrid.

Banking reform is seen as urgent by many analysts, with yields on benchmark Spanish bonds currently close to six percent, meaning the country faces very high borrowing costs.