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EU welcomes Spanish bank reform, warns on deficit

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(MADRID) - The European Union on Monday welcomed efforts by Spain to repair its banking sector but warned that the country risked missing its public deficit-cutting targets.

Spain is poised in January to exit a programme to shore up its banks' balance sheets, swamped in bad loans since a property bubble imploded in 2008.

Last year, the eurozone agreed to make a rescue loan of up to 100 billion euros ($135 billion) to fix the banks. Madrid has used 41 billion euros of the total credit.

"The stabilisation and repair of the financial sector have advanced further amid tentative signs of economic recovery," the European Commission said in a review of the banking reforms.

"The timely and adequate implementation of the policy conditionality of the programme, together with visible progress with growth-enhancing structural reforms, has been accompanied by a return of investor confidence," it added.

"A continuation of the positive trends is required for the successful completion of the programme according to the planned timeline."

The European Commission, which sent a mission to Madrid from September 16-27, said investors' confidence in Spain had gradually returned, allowing Madrid to tap the financial markets for funds.

Spain, which boasts the fourth-largest economy in the eurozone, is enjoying a fall in sovereign borrowing costs in a dramatic turnaround since market pressures pushed it close to a full-blown bailout in mid-2012.

"Confidence in the Spanish financial system is back," Economy Minister Luis de Guindos said in an interview with Spanish public television.

"There are no doubts about the liquidity and solvability of the Spanish banking sector," he added.

But the European Commission said the banks still face risks.

"Despite positive developments, the economic environment continues to weigh on the banking sector and constitutes the main risk factor going forward," it said.

Spanish banks have transferred many of their dodgy assets to a "bad bank", called Sareb, which aims to pool the bad assets and sell them at a discount.

But they still report high levels of bad loans.

Risky loans, mostly linked to the collapsed property sector, climbed by 6.9 billion euros from the previous month to an unprecedented 187.8 billion euros in September, a Bank of Spain report showed Monday.

The bad loans rose to 12.68 percent of all credit extended by banks in Spain in September from 12.14 percent in August, representing a fourth consecutive record high.

European Union chiefs last week said Spain's draft 2014 spending plans placed it "at risk of non-compliance" with its deficit-cutting targets. Spain has agreed to respect EU-norms by reducing the deficit to less than three percent of total economic output by 2016.

The latest Commission report underscored that warning.

"Reining in the fast-rising public debt demands further fiscal consolidation and strengthening of public finance management," it said.

"There is a risk that the draft budgetary plan for 2014 may not fulfil the requirements" of Spain's deficit-cutting commitments, the report added.


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