–Updating story transmitted at 05:04 EDT

MADRID (MNI) – This year will continue to be difficult both for
Spain’s economy and its banking system, European Central Bank Governing
Council member Miguel Angel Fernandez Ordonez said on Tuesday.

Ordonez, who heads the Bank of Spain, warned at a conference
against complacency and urged more ambitious reform, noting that
confidence can be easily lost.

There is nevertheless a basis for hope, he said, observing that
“the [Spanish] government, the [Spanish] parliament, European
authorities, the ECB, the Bank of Spain and our own lending institutions
have taken steps in the right direction, and this has been reflected in
the perception of the markets in the last weeks.”

However, he continued, market confidence “can be lost with ease,
and thus it is not appropriate to fall into self-complacency.”

Spain’s economy and banking system stand to emerge not merely “with
flying colors” but even strengthened from the present “difficult
situation,” he said. “But for this it is essential to maintain the
continuity and the ambition of reforms.”

Meanwhile, one must be patiently optimistic. This year “will
continue to be another year of adjustment and, for the banking system,
will even be one of the toughest years,” Ordonez said.

He noted that most forecasts envision a “more intense” economic
recovery in Spain in the second half of 2012 and in the years
thereafter.

The more favorable economic environment should, along with other
factors such as restructuring of savings banks and the concomitant
reduction of excess capacity in that sector, improve Spanish banks’
profitability, he predicted.

Demand for credit will recover only slowly in Spain, Ordonez said,
but it is important that the banking sector be prepared to lend more to
companies and households when demand does improve.

In this context, he observed, so-called zombie banks, which would
not have been in a position to provide credit, have been prevented from
surviving.

He noted that the most recently enacted Royal Decree Law (RDL) with
respect to the banking sector has allowed Sapin to avoid of a strong
credit crunch, which might otherwise have resulted from the lack of
market access faced by Spanish banks.

Ordonez noted that although the “large majority” of Spanish banks
satisfy the requirements of the RDL, which hiked capital requirements,
12 entities need additional capital to comply.

However, he added, the Bank of Spain will need to analyze 13
recapitalization plans in view of the fact that one of the banks is
splitting.

The Spanish central bank will approve or demand the modification of
the recapitalization plans, which were submitted last week and, absent
the granting of an extension, should be implemented by the end of
September, he affirmed.

Where banks need public funds to recapitalize, this does not
constitute a nationalization of the entities concerned, he stressed, but
rather, “assistance of an exceptional and temporary nature,” since the
funds must ultimately be repaid.

Markets’ reaction has shown that the RDL has been quite capable of
boosting confidence in the Spanish banking system, he asserted.

With respect to the real economy, Ordonez called for patience and
reiterated that the immediate future continues to be an adjustment
phase.

“Although some of the principle imbalances have experienced a
notable correction in the last years, it is still soon for our economy
to be in a position to resume a phase of vigorous growth,” he said.

For this, he explained, overhang in the real estate sector remains
to be digested and more dynamism is required for the net creation of
jobs.

Last year’s structural reforms were a step forward that must be
continued, he urged. He cited in particular fiscal reform and the
restructuring of savings banks.

It would be “injust” not to mention the actions of European
authorities, Ordonez said. “If initially there were serious problems of
communication and lack of coordination, it is certain that subsequently,
they adopted measures that go in the correct direction of greater
economic discipline and that will help improve confidence, such as the
reform of economic governance and of the Stability and Growth Pact or
the recent ‘Pact for the Euro’.”

“And of course,” he added, “neither can we forget the contribution
of the ECB with its policy of unlimited liquidity provision and with its
programs of buying bonds as well as the bonds of the countries most
punished by the crisis.”

Both the authorities and private economic agents have thus “made a
very important effort in the appropriate direction, for which the
process of adjustment in the banking sector and in the whole of the
Spanish economy is progressing reasonably,” he said.

In other comments, Ordonez argued that while the bank stress tests
in 2010 were criticized, Spain conducted its tests with “rigor and
transparency,” to some extent “in contrast with what happened in other
countries.”

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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