Spain makes banks address 50 billion euro property hole

MADRID (Reuters) - Spain is forcing its banks to recognise and deal with an additional 50 billion euros (41 billion pounds) in losses on assets left over from the country's property crash, renewing efforts to cleanse its sickly lenders' balance sheets.

Spanish banks had already written down property holdings and bad loans to housebuilders by about 30 percent in an earlier financial sector reform.

The government said on Thursday it was now demanding they book losses of up to 80 percent on assets such as undeveloped land that banks took as collateral after property developers went bankrupt.

In order to encourage further consolidation in the sector, the government gave banks involved in mergers more time to meet the new demands, two years as opposed to one for those going it alone.

Spain's battered banks have cut back on lending to families and small businesses in a country desperately in need of credit as it continues to battle the euro zone debt crisis and heads into a second recession in four years.

"This reform intends to get houses onto the market and give Spanish banks better access to capital markets, which will in turn allow them to lend to consumers," Economy Minister Luis de Guindos said at a news conference.

The banking system has some 176 billion euros worth of exposure to troubled real estate assets, equivalent to 18 percent of the country's economic output.

By cleaning the banks' balance sheets of worthless property the new government hopes to rekindle investors' faith in Spanish banks, allowing them to borrow on the international money markets. The banks have been largely shut out of interbank lending markets since the Greek bailout in early 2010.

AVOIDING A BAILOUT

The move is part of a raft of measures including labour reform and austerity cuts carried out by the government to convince investors Spain does not need a bailout.

Banks must make a specific provision totalling about 25 billion euros across the entire sector, de Guindos said.

In addition, banks must put aside capital equal to 20 percent of the book value of undeveloped land and 15 percent of the book value of unfinished developments. That will amount to around 15 billion euros for all the banks and can come from profit, capital hikes or convertible bonds.

For performing real estate loans, banks must make a generic provision of 7 percent to total around 10 billion euros. Previously banks were not required to make any provisions for those loans.

Spain's biggest banks in terms of assets, Santander (SAN.MC) and BBVA (BBVA.MC), which have huge operations outside of the country, are expected to easily meet the new requirements.

Bankia (BKIA.MC), which has the biggest number of banking clients in Spain, is highly exposed to troubled property assets, and analysts believe it may seek to merge with another entity in order to handle the new losses.

However, Bankia's parent group BFA said late on Thursday it would be able to reach the new demands by bond issues, asset sales and from profits.

The government will lend to banks that struggle to meet the new requirements through convertible shares. If a bank fails to pay back the loan during this time, the state will take it over.

Spain will boost the equity in its state-backed bank restructuring fund, the FROB, to 15 billion euros from 9 billion euros, the Economy Ministry said.

The reform is very similar to the former Socialist government's 2009 round of mergers and recapitalisation, which was not seen to have gone far enough.

Banks looking to merge to meet the new requirements must present their plans before May 30 of this year.

(Reporting By Sonya Dowsett; Editing by Tracy Rucinski and Will Waterman)