European bank jitters as Spain steps in to save Cajasur

Investors are braced for fresh turbulence in European bank shares after Spain's authorities stepped in to rescue Cajasur, one of the country's largest regional lenders.

The Bank of Spain intervened over the weekend after merger talks with Unicaja broke down. Cordoba-based Cajasur can draw €550m (£477m) immediately from the state's Fund for Orderly Bank Restructuring. "This will guarantee that it can continue to operate and fulfil its obligations," said the central bank.

The collapse of Cajasur is likely to revive fears over the health of Spanish banks, which skirted the US subprime crisis but are succumbing to local property busts. Cajasur is heavily exposed to second homes on the Costa del Sol, where prices are in free fall. Goldman Sachs said Spain's property companies have debts of €445bn, or 45pc of GDP, mostly owed to savings banks known as cajas. The stock of unsold homes reached 926.000 at the end of last year.

"Banks may not be able to recoup large parts of these loans. These losses will have to be recognised eventually, bringing down many institutions," it said. The bank added that the two giants, Santander and BBVA, are in good health.

The rescue follows a move by the Bank of Italy last week to suspend mark-to-market accounting for eurozone government bonds, thus alleviating strains on banks' capital ratios.

The rule change brings Italy closer in line with other eurozone states and keeps the lending taps open, but has raised eyebrows in the City.

"It means that they don't have to take a capital hit, which makes you think one or more Italian banks have very significant exposures to countries whose debt is under pressure," said John Hitchins, a banking expert at PricewaterhouseCoopers.

Ireland was rattled by warnings from Morgan Kelly, professor of economics at University College Dublin, that the open-ended rescue of the Irish banks would ruin the country. "What will sink us, unfortunately but inevitably, are the huge costs of the bank bailout," he wrote in the Irish Times. "Even under the most optimistic assumptions about government spending cuts and bank losses, by 2012 Ireland will have a worse ratio of debt than Greece."

Mr Kelly said Irish banks were likely to lose €50bn to €70bn, adding a further 30pc of GDP to public debt. The professor was scorned when he warned in early 2008 that the banking system would have to be rescued. This time markets may pay attention.