Cajasur bank bail-out prompts euro falls

The euro has fallen and shares in Spanish banks have been hit following the government rescue of one of the country's biggest regional lenders.

The euro fell two cents against the dollar, while Spain's three biggest banks, Santander, Banco Popular and BBVA, saw shares fall by 2-3%.

Cajasur was taken over by Spanish authorities on Saturday after talks to merge it with a profitable bank ended.

Cajasur ran into trouble due to its exposure to the Spanish housing market.

Like many of the 45 savings banks operating in Spain, Cajasur invested heavily in the property sector, causing a boom in construction before its collapse following the financial crisis.

But the market's collapse has now left lenders with debts worth 445bn euros, according to Goldman Sachs.

Euro falls

The Bank of Spain has taken over the running of Cajasur, giving it access to 550m euros (£474m; $686m) of emergency funding.

The action was taken after a planned merger between Cajasur and savings bank Unicaja fell though at the end of last week.

Euro v US Dollar

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Cajasur currently operates 486 branches.

At least 16 savings banks - many of which are run by local authorities or churches - are now in merger talks in an effort to provide financial stability.

The move also affected the currency markets, with the euro down against both the pound and the dollar.

The single currency was down two cents against the dollar at $1.2372, and was down nearly a cent against the pound, with a pound buying 1.1627 euros.

Analysts said the bail-out would raise fresh concerns among investors about the stability of the Spanish banking sector, and the ability of the Spanish government to repay its debts.

Last week Spain approved plans for a 15bn euro package of austerity measures designed to reduce its debts.

Meanwhile, the IMF has raised fresh concerns over the strength of the Spanish economy, calling for "far-reaching and comprehensive reforms" to ensure economic recovery.

"The challenges are severe: a dysfunctional labour market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anaemic productivity growth, weak competitiveness and a banking sector with pockets of weakness," the IMF's latest report said.

It said urgent reform of the labour market was needed, while banking sector reforms needed to be implemented more quickly.

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