MADRID Spain's government rowed back on Thursday on claims of massive potential Chinese funds for its ailing savings banks, but said China was still studying an investment.
China Investment Corp denied it was a $9 billion (5 billion pounds) investment, after a Spanish government source said the sovereign wealth fund and other Chinese investors may inject a total of $13 billion into the struggling savings banks sector.
Spain's savings banks -- saddled with bad loans to property developers -- are on a hunt for new capital as the euro zone's fourth largest economy seeks to reassure markets it will not have to rescue its financial system.
"This was an error in communication. There is a will to invest in the savings banks and Spanish debt ... but clearly we can't give specific amounts or name particular funds," a Spanish government source said on Thursday, amending what another government source had said a day earlier from Beijing.
Spanish Prime Minister Jose Luis Rodriguez Zapatero is visiting China and Singapore this week, meeting with officials and fund managers to persuade them that Spain's sovereign bonds and financial system are a good investment.
Debt markets are still not fully convinced that Spain will avoid following Greece, Ireland and Portugal in seeking an European Union- and IMF-backed bailout.
The premium investors demand to hold Spanish over German debt has fallen since Portugal announced it would need to apply for aid, though it rose to around 190 basis points on Thursday, around six basis points wider from Wednesday's close.
One trader said the rise was due to a bounce from recent outperformance and not a sign of growing contagion risk amongst the peripheral economies.
It was not clear what terms would make the risk of a hefty investment in Spanish banks attractive to China. CIC has invested cautiously in overseas financial markets in the last couple of years.
But one economist said the CIC denial was more likely to reflect a diplomatic gaffe than a policy rethink.
"Generally our perception is that China and the Asian investors have been very supportive of initiatives to restore the situation in the euro zone peripherals," RBS's Silvio Peruzzo said.
"This goes beyond the potential return in investment and is more related to the necessity to guarantee the stability of the euro as an alternative in terms of risk management to the dollar."
China's foreign exchange reserves soared to a record of more than $3 trillion by end-March and its money supply growth blew past forecasts, threatening to aggravate the nation's inflation woes and trigger more policy tightening.
Also on Thursday, Spain's Central Bank approved the recapitalisation plans of 13 banks and savings banks that fell short of strict new capital requirements, including a $4 billion application for state funding from troubled regional bank Caja Mediterraneo (CAM).
The central bank has said the banks, or cajas, need up to 15 billion euros to recapitalise.
The cost to insure Spanish domestic banks' debt against default rose on Thursday, though one analyst said the widening of CDS spreads was due to external worries rather than domestic events and called results by Bankinter (BKT.MC) and ECB borrowing figures "credit positive."
"We would attribute market concerns on Greece as a possible driver of Spanish caja CDS widening as peripheral risk aversion increases," bank analyst at Societe Generale Hank Calenti said.
A recent improvement in refinancing costs for the Spanish sovereign has opened the door for banks, mostly shut out of wholesale markets through 2010.
Spanish banks' borrowing from the European Central Bank fell to its lowest level in over three years, data from the Bank of Spain showed on Thursday.
Spanish retail bank Bankinter reported on Thursday net profit fell 26 percent in the first quarter from a year ago while Banesto's BTO.MC net profit slumped 20 percent in the same period.
(Additional reporting by Nigel Davies, Judy Macinnes and Sonya Dowsett in Madrid, and Aileen Wang in Beijing; Editing by John Stonestreet/Ruth Pitchford)