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Spain unveils EUR 50bn bank sector clean-up

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(MADRID) - Spain's government unveiled reforms Thursday that will oblige banks to clean up their bad loans by building up provisions and capital reserves totalling 50 billion euros ($65 billion).

"This reform aims to improve confidence and the credibility of the Spanish financial sector," said Economy Minister Luis de Guindos, announcing the measures at a news conference.

The banking sector is weighed down by a mountain of soured loans and property assets that are losing their value after the collapse of the Spanish property market in 2008.

According to the Bank of Spain, the sector had 176 billion euros in problem loans and seized real estate in June 2011 -- a figure which has probably increased since, as the economy has weakened.

The sector has undergone a major restructuring since 2008 but the government considers it still to be at risk despite banks putting aside a third of this amount to cushion the blow when they sell off the bad assets.

The new reform aims to "generate mergers to form viable entities" out of struggling ones so that "the clean-up will be quick and deep", De Guindos said.

From now on the level of provisions must increase to 80 percent of the total value of assets for some troubled banks and a general provision requirement of 7.0 percent will be imposed on others considered stable.

"This process must be carried out in one year," without any new public aid except possible contributions from an existing banking bailout fund, he added.

The banking reform is one in a series by the conservative government, which took power in December promising to cut Spain's deficit and rein in an unemployment rate which has reached nearly 23 percent.

De Guindos said the bill would probably be approved at a cabinet meeting on Friday. It will later pass to parliament, where Prime Minister Mariano Rajoy's party holds a majority, making it certain to be adopted.

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