LONDON—Spain's plan to rescue its regional banks is running into headwinds as private investors, who are being asked to pour in cash, and ratings firms raise questions about whether the lenders have admitted to all of their real-estate losses.
Raising private capital to bail out Spain's private savings banks, or cajas, is an increasingly important test of confidence in Spain, especially since the market became convinced that neighboring Portugal would need a bailout.
Eight of Spain's cajas must present their capital-raising plans to regulators by April 10. That has caused a flurry of activity in recent weeks as savings banks sounded out hedge funds and private-equity funds and others pursued initial public offerings.
But the exercise has stirred questions from investors about the level of reserves that the banks hold against real-estate risk in their portfolios. The banks also have faced questions over whether their executives have distanced themselves sufficiently from local politics; in some cases, they have even been quizzed about managements' own understanding of what is on their books.
In general, "people don't understand what they are buying," said a Spanish banker who has tried to get investors interested in the cajas.
The pressure on Spain to show that it can clean up its banking sector has heated up in recent days. Moody's Investors Service on Thursday downgraded Spanish banks, citing, in part, greater financial pressures on the Spanish government and its smaller lenders.
"We remain cautious on the capacity of savings banks to get private funds, to the extent that private investors may have concerns on whether savings banks have undertaken an upfront recognition of losses," said Alberto Postigo, a senior analyst at Moody's.
Meanwhile, Portugal's possible bailout by the European Union has raised the question of whether Spain will need intervention, too, although Spanish financial markets Thursday appeared unaffected by worries on Portugal, suggesting that investors have more confidence in Spain's overhaul of its ailing economy.
The savings banks have until September, with some exceptions, to raise their core Tier 1 capital ratios—a key measure of financial strength—or turn to the Spanish state for funds. Spanish authorities said earlier this month that the entire banking sector needs €15.1 billion ($21.3 billion) to meet these new rules, although they said a significant amount could come from the private sector.
Spain's Fund for Orderly Bank Restructuring has made available €15 billion to assist the sector. Sovereign wealth funds from Qatar and United Arab Emirates have also pledged funds to invest in the savings-bank sector, although the recipients haven't been disclosed.
If little capital can be raised from outside investors, "it will be a disappointment for the whole Spanish market," said a Madrid-based fund manager.
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