* Centre-right party seen winning November election
* First reform will be further clean-up of financial sector
* New capital holes could be filled by euro zone bailout fund
By Fiona Ortiz
MADRID, Sept 27 The People's Party, expected to oust the Socialists in a November election in Spain, will enact fresh financial sector reform immediately, forcing banks to write down property holdings and mop up bad loans, a top party official said.
The Socialists, in power for eight years, have already pushed weak savings banks to merge with each other, find new investors and significantly boost capital as Spain tries to persuade investors its financial system is healthy.
But there are still doubts about the value of property collateral on banks' books, especially undeveloped lots which are hard to price since the market is frozen. Those doubts are complicating efforts by five banks still trying to raise capital. [ID:nLDE78804P]
Banking reform has been a key element in Spain's effort to gain market credibility during a euro zone debt crisis that has pushed Greece, Ireland and Portugal into accepting bailouts.
"We believe that what we have to do is clarify the value of the assets, through selling them, on the market as much as possible. Our idea is a real mark to market," People's Party
(PP) economy secretary Alvaro Nadal told Reuters in an interview.
Polls show the PP, has a lead of 15 percentage points over the Socialists heading into the Nov. 20 election, and Nadal said fresh banking sector reforms were the very first thing a PP government would do.
Spain's banks were heavily exposed to a property boom that burst in 2007, souring loans to developers. Official figures show 700,000 properties remained unsold across Spain at the end of 2010. [ID:nL5E7KQ1IB]
The government has already taken over some banks, such as Cajas de Ahorros del Mediterraneo (CAM) (CAHM.MC), heavily exposed to the depressed tourism property market on the Mediterranean coast, but is now struggling to sell it off as its losses have mounted. [ID:nL5E7KQ35Q]
Bad loans as a percentage of total loans are about 7 percent, the highest since February 1995, and total 125 billion euros ($168 billion).
As of February, the banking system held 64 billion euros of property on its books, valued on a cost basis, and had provisioned for 30 percent of that, according to bank data compiled by Reuters.
Nadal said the PP had not yet decided what mechanism to use to force banks to sell, adding there were several ways to do it.
"It has an immediate effect because you reach a price of equilibrium on the real estate market and you activate the market," he said.
Polls show voters were set to punish the Socialists for their handling of the economic crisis and the European Union's highest jobless rate -- one in five are out of work.
The PP are counting on a majority in the legislature as well as their control of most of Spain's autonomous regions and city halls, to push through an ambitious reform agenda including the bank clean up and labour market reform. [ID:nL6E7IJ0OL]
While house prices have fallen 17 percent, analysts polled by Reuters said there was still a long way to go before they stabilised. [ID:nLDE73I1N0]
Nadal said the forced shedding of assets and marking to market over a 12-18 month period would leave banks needing fresh capitalisation, which could come from the euro zone's bailout fund, the European Financial Stability Facility, under its expanded powers.
"I am asking a huge effort by the banking sector, huge... But what we get is that investors see clean banks they are interested in," he said.
Spain's large, diversified banks, such as Santander (SAN.MC), say the maximum potential losses they would suffer in further Spanish property writedowns were not relevant within their profits.
Once the troubled savings banks have sold off property and boosted provisioning for bad loans, a PP government would be open to selling them to any private entity serious about running a bank, Nadal said.
Banks would have to revive commercial lending in exchange for receiving another round of capital, Nadal said, adding the virtual freeze in bank lending in Spain was stifling growth.
"The Spanish banking problem is manageable," he said, even assuming writedowns on the property assets.
Economists close to the PP have also proposed the new government take over 5-7 seven banks, and separate their toxic assets into a bad bank where the state would assume large losses. Nadal said he was not in favour of creating a bad bank.
Spain's central bank has estimated the banking sector needs a maximum 17 billion euros on top of around 10 billion of convertible preference shares the government has already injected into the cajas.
Nadal said his estimate was significantly higher but he declined to put a figure on it.
The consensus among analysts and economists is that the capital shortfall is 30-60 billion euros.
The Bank of Spain's new requirements for banks are 8 percent core tier 1 capital ratio -- a measure of financial strength -- for banks listed on the stock exchange or have significant private investment, and 10 percent for those who do not.
Nadal said the PP has never agreed with those requirements, because it felt the first step should have been to clean up the property and bad loans on the banks books, then look at how much capital was needed. It would be tough to change those requirements, now, he said, but not impossible.
"We would have to test the market to see if it accepts a combination of clean-up with more capital and therefore relax the capital requirements ... First we have to gain credibility."
($1 = 0.742 euro)
(Editing by Dan Lalor)
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