Spanish government approves 30-billion-euro bank fund

(MADRID) - The Spanish government approved on Friday the creation of a 30-billion-euro emergency bank fund to buy bank assets and spur lending, as well as a five-fold increase in its bank deposit guarantees to 100,000 euros (136,000 US dollars).

The creation of the temporary fund, which could be extended to 50 billion euros (68 billion dollars) if necessary, was approved at a regular weekly cabinet meeting, Deputy Prime Minister Maria Teresa de la Vega said.

"This is a way to re-establish the normal functioning of our financial system, a decisive way to reactivate the economy and encourage the creation of jobs," she told a news conference.

"This is a necessary measure which is good for the country and for its citizens, a good measure for families and firms," she added.

Prime Minister Jose Luis Rodriguez Zapatero announced the increase in the bank deposit guarantees from 20,000 euros and the creation of the fund, which will be managed by the Treasury, on Tuesday as part of efforts to battle the effects of the global financial crisis.

The government estimates the creation of the fund will push up its ratio of public debt to gross domestic product by almost three points to 41.5 percent.

Unlike government bailouts in the United States, the fund will not be used to buy bad loans and other "toxic" assets but will instead focus on buyying mortgages and assets with the best "AAA" ratings.

The government hopes these acquisitions will unfreeze credit markets by making banks more willing to make loans to households and firms.

Economic activity around the world is slowing because banks have become increasingly reluctant to lend money in the wake of the US subprime mortgage crisis, which erupted last year, saddling many institutions with toxic assets.

Spain faces the risk of its first recession in over a decade in large part because its key property sector has been hammered by the impact of rising interest rates, domestic oversupply and the international credit crunch.

The International Monetary Fund on Wednesday predicted the Spanish economy, the fifth largest in the European Union, will shrink by 0.2 percent next year after posting growth of 1.4 percent in 2008.

It said Spain would be harder hit by the global financial crisis than other European countries because of the decade-long property boom which the country is experienced had come to an end.

Spain's socialist government predicts the economy will expand by 1.6 percent this year and 1.0 percent next year.

The country has until recently had one of the developed world's fastest growing economies, its gross domestic product having expanded by 3.7 percent last year.