HispanicBusiness

German Chancellor Angela Merkel on Thursday defended Spain's economic reforms while the parliament in Madrid approved a bank reform and markets maintained pressure on Spain over the crisis of the country's fourth-largest bank Bankia.

"Spain is ... very much an ally on the path of simultaneously conducting fiscal consolidation and generating growth," Merkel told reporters in the port-city of Stralsund, where she had attended a summit of Baltic Sea states.

The chancellor stressed that almost all eurozone nations had safety nets for banks.

"One can surely make clearer to the international financial markets that the new institutions and new capabilities now exist in Europe so as to ease concern that banks might perhaps be unstable," she said.

Spain's parliament approved a bank reform which had already been announced by the government. The reform passed mainly with the votes of Prime Minister Mariano Rajoy's conservative People's Party (PP), which has an absolute majority in parliament.

Spanish banks hold a total of more than 300 billion euros (370 billion dollars) in real estate assets, including about 180 billion euros in toxic assets in the form of housing, land and loans following the meltdown of the country's property bubble four years ago.

The reform orders banks to raise 28 billion euros in provisions to cover sound assets in their real estate portfolios, in addition to 54 billion euros in provisions against sour assets which they were told to set aside earlier on. Banks unable to raise the provisions can get loans from the state.

Economy Minister Luis de Guindos earlier estimated the banks' needs at 15 billion euros, but it turned out to be a gross under-estimate, given that Bankia alone needs an injection of 19 billion euros.

Guindos now said the banks' needs would become clear in a month's time, when the International Monetary Fund and two independent consulting companies will publish their conclusions on the state of Spanish banks.

The reform approved on Thursday also orders banks to place bad real estate assets in liquidation societies so they can be evaluated and sold off.

Bankia, which was the bank most exposed to the collapse of the housing boom, was nationalized partly earlier in May.

Spain failed to own up to the extent of funding problems at Bankia, European Central Bank President Mario Draghi said on Thursday.

Speaking to the economic affairs committee of the European Parliament in Brussels, Draghi said that coming out with "a first assessment, then a second, then a fourth" of a bank's recapitalization needs "is the worst possible way of doing things."

The ratings agency Fitch meanwhile downgraded the credit ratings of eight of Spain's 17 semi-autonomous regions, whose high debts are largely responsible for the country's budget deficit of 8.9 per cent. Catalonia's debt was downgraded near junk level.

Financial markets continued penalizing Spain. The risk premium measuring the difference between Spanish and German 10-year bonds reached 539 basis points, the highest since the creation of the euro. It later fell down to 520 basis points.

Treasury secretary of state Inigo Fernandez de Mesa nevertheless said Spain was obtaining financing "with total normality." Spain had already covered most of its needs for this year, the official said.

The government maintains that Spain's borrowing costs are rising mainly because of the Greek crisis, but analysts also link them to Bankia.