China Still Interested in Investing in Spanish Banks: Report

China is interested in investing in Spain's savings banks, a Spanish source insisted on Thursday, brushing off a denial from Beijing as markets awaited news of how the ailing lenders plan to plug their funding gaps.

China Investment Corp, the country's sovereign wealth fund, said earlier on Thursday it was not considering a $9 billion investment, after another Spanish source said China may inject a total of $13 billion into the struggling sector. [ID:nL3E7FE0CP]

"This was an error in communication. There is a will to invest in the savings banks and Spanish debt ... but clearly we can't give specific amounts or name particular funds," the second source -- like the first, within government -- said.

"The reports are groundless and are not in line with the truth," a CIC official, speaking on the condition of anonymity, told Reuters earlier in Beijing.

Spain is under intense scrutiny by international debt markets, concerned the euro zone's fourth largest economy will follow Greece, Ireland and Portugal in seeking an European Union- and IMF-backed bailout.

The premium investors demand to hold Spanish over German debt has fallen since Portugal announced it would need to apply for aid, though rose again to around 190 basis points on Thursday, up around 9 basis points on the day.

One trader said the rise was due to a bounce from recent outperformance and not a sign of growing contagion risk amongst the peripheral economies. [ID:nLDE73D0IB]

It was not clear what terms would make the risk of a hefty investment in Spanish banks attractive to China. CIC has invested cautiously in overseas financial markets in the last couple of years partly to avoid any criticism it is squandering reserves.

But one economist said the CIC denial was more likely to reflect a diplomatic gaffe than a policy rethink.

"Generally our perception is that China and the Asian investors have been very supportive of initiatives to restore the situation in the euro zone peripherals, RBS's Silvio Peruzzo said.

"This goes beyond the potential return in investment and is more related to the necessity to guarantee the stability of the euro as an alternative in terms of risk management to the dollar, so there is a strong interest in the region's stability."


The Bank of Spain is set to pass judgment on savings banks' plans to raise capital on Thursday after market close, giving investors a clearer picture of how the regional banks plan to refinance themselves. [ID:nLDE73C0TC]

The central bank has said the banks, or cajas -- battered by a prolonged housing slump and uncertainty over property values -- would need up to 15 billion euros ($21.7 billion) to recapitalise according to strict new solvency rules.

However, a recent improvement in refinancing costs for the Spanish sovereign has opened the door for banks, mostly shut out of wholesale markets through 2010, searching for funding alternatives.

Spanish banks' borrowing from the European Central Bank fell to its lowest level in over three years, data from the Bank of Spain showed on Thursday. [ID:nLDE73D072]

The banks' struggle to secure funds has led many to engage in a deposit war to capture retail accounts which, coupled with increased provisioning against potential bad debts, has hit bottom lines.

Spanish retail bank Bankinter <BKT.MC> reported on Thursday net profit fell 26 percent in the first quarter from a year ago while Banesto's <BTO.MC> net profit slumped 20 percent in the same period. [ID:nLDE73C26G]

But Bankinter management said funding costs are easing compared to the fourth quarter due to the improvement in Spanish sovereign debt spreads.[ID:nLDE73C26G]

(Additional reporting by Nigel Davies, Judy Macinnes; Editing by John Stonestreet)