Borrowing lift for Spain as it rejigs banks

The Spanish government's borrowing costs fell yesterday after the European Commission approved a plan by Madrid to restructure its ailing banking sector.

The commission's approval opens the way for Madrid to draw down €37bn (£30bn) from the €500bn eurozone rescue fund in order to clean up its lenders. Spanish 10-year bond yields declined 10 basis points to 5.34 per cent in response to the news.

Under the recapitalisation agreement, Bankia, Banco de Valencia, NCG and Catalunya Banc, which have been taken into public ownership by Madrid, must cut their balance sheets by 60 per cent over the next five years and shut half of their deposit-taking branches. "Our objective is to restore the viability of banks receiving aid so that they are able to function without public support in the future," said the European Competition Commissioner Joaquin Almunia.

Bankia said it would cut 6,000 jobs, about 28 per cent of its workforce, and offload €50bn in assets. The banks will also transfer €45bn of toxic loans to a "bad bank" set up by the Madrid government. Under the deal, the banks will be forbidden from lending more to property developers, which is where most of their bad loans originated.

The Bank of Spain said in a monthly report yesterday that the country's economy, the fourth-biggest in the eurozone, would continue shrinking in the final months of 2012. Even with Spain in recession for the past year, the right-leaning government has pushed on with austerity in the teeth of rising street protests.

One in four workers in Spain is unemployed and the government is forecasting a contraction of at least 1.5 per cent this year.