The information contained in this Newsletter is of a general nature and does not constitute legal advice


 

October 2008

COMMERCIAL LAW

MEMORANDUM ON THE DECISIONS ADOPTED BY THE COUNCIL OF MINISTERS OF THE GOVERNMENT OF SPAIN ON 10 AND 13 OCTOBER 2008 REGARDING THE FINANCIAL SYSTEM

1. Raising of the amount guaranteed by the Deposit Guarantee Fund and the Investment Guarantee Fund (More information)

2. Creation of the Fund for the Acquisition of Financial Assets (More information)

3. State guarantee on the issuance of bank debt (More information)

4. Recapitalisation of distressed credit entities (More information)


MEMORANDUM ON THE DECISIONS ADOPTED BY THE COUNCIL OF MINISTERS OF THE GOVERNMENT OF SPAIN ON 10 AND 13 OCTOBER 2008 REGARDING THE FINANCIAL SYSTEM

In response to the serious financial difficulties that the global economy is currently facing, the Economic and Financial Affairs Council of the European Union adopted several recommendations on 7 October 2008 regarding measures to be taken to promote the stability of the financial system with the purpose of coordinating the different policies of the Member States in this area.

Following the recommendations, and taking into account initiatives taken by other Member States, the Council of Ministers of the Spanish government approved several measures at its meeting held on 10 October 2008 aimed at reinforcing the confidence of depositors and investors in Spanish credit entities and investment services firms and facilitating the funding of companies and individuals. In particular, the measures taken were (i) increasing the maximum guaranteed amount by the Deposit Guarantee Fund and the Investment Guarantee Fund and (ii) creating the Fund for the Acquisition of Financial Assets of credit entities and securitisation funds.

Moreover on 12 October 2008 at an extraordinary summit held in Paris, the Heads of State and Government of Euro zone countries agreed on a series of additional measures aimed at stimulating the interbank money market and providing liquidity to credit entities and facilitating their funding on a medium term basis as well as strengthening their capital structure. To that end, at an extraordinary meeting held on 13 October 2008, the Council of Ministers adopted the relevant resolutions to implement the measures agreed upon at the summit held in Paris. The measures included (i) the issuance of a state guarantee for funding transactions of Spanish credit entities and (ii) in certain extraordinary circumstances, the subscription of securities of Spanish credit entities requiring a strengthening of their equity.

The following sections describe each of the measures adopted by the Council of Ministers of the Spanish government during their meetings held on 10 and 13 October 2008.

1. Raising of the amount guaranteed by the Deposit Guarantee Fund and the Investment Guarantee Fund

At its meeting held on 10 October 2008, and in order to maintain and increase the confidence of depositors and investors in Spanish credit entities and investment services firms, the Spanish government approved increasing the maximum amount guaranteed by the Deposit Guarantee Fund and the Investment Guarantee Fund up to one hundred thousand euros per account holder and entity. This measure is applicable to deposits of cash or securities in credit entities and investment services firms authorized to operate in Spain, including those that are subsidiaries of foreign credit entities or foreign investment services firms as well as the branches of such entities which are adhered to these funds, but not to the branches of  foreign entities not adhered thereto nor to entities taking deposits or providing investment services on a cross-border basis.

The measure was implemented by the enactment of Royal Decree 1642/2008 of 10 October amending article 7.1 of Royal Decree 2606/1996 of 20 December on the Deposit Guarantee Fund of Credit Entities and article 6.1 of Royal Decree 948/2001 of 3 August on compensation schemes for investors in relation with the amounts guaranteed under those articles. Royal Decree 1642/2008 entered into force on 11 October 2008, the date of its publication in the Spanish Official Gazette.

2. Creation of the Fund for the Acquisition of Financial Assets

On 10 October 2008, with the purpose of encouraging funding for individuals and companies resident in Spain, the Spanish government also approved the creation of the Fund for the Acquisition of Financial Assets (Fondo para la Adquisición de Activos Financieros, “FAAF”). The FAAF is created on a temporary basis and will cease to exist when the financial market conditions that led to its creation disappear.

The FAAF will be governed by the criteria of objectivity, profitability, transparency, efficiency and diversification and will invest in financial assets of the highest quality issued by credit entities and securitisation funds backed by loans granted to individuals, companies and non-financial entities. The legislation does not clarify whether the branches of foreign entities operating in Spain will be also eligible to participate in the asset purchase program to be developed by the FAAF. The FAAF will favour the acquisition of assets backed by new credit, meaning that granted after 7 October 2008.

The FAAF will be allocated thirty billion euros, which may be increased to a maximum of fifty billion euros. The first transactions may be carried out in the last quarter of 2008, for which purpose an extraordinary credit for this year has been approved amounting to ten billion euros which may be increased to thirty billion euros, to be financed through the issuance of public debt.

The administration, management and governance of the FAAF will be headed by the Ministry of Economy and Finance through the fund’s Governing Council and its Executive Committee. The Governing Council will be the body responsible for establishing FAAF’s investment guidelines, monitoring and evaluating its activity as well as for deciding on the application of income obtained from its assets and the result of the maturity or sale of such assets. The Executive Committee, on the other hand, will manage the FAAF and will decide on investments with the advice of a technical committee.

To carry out its transactions, the FAAF will employ auction procedures for the selection of assets and will carry out the relevant acquisitions in accordance with the usual mechanisms of the financial markets.

The management of FAAF will be subject to both the control of the General State Comptroller (Intervención General de la Administración del Estado) and parliamentary control through the evaluation of the management report of the FAAF which will be sent quarterly to the Economy Committee of the Spanish Congress.

The rules governing the operation of the FAAF are contained in Royal Decree-Law 6/2008 of 10 October which creates the Fund for the Acquisition of Financial Assets and will enter into force on the day following its publication in the Official Spanish Gazette, which occurred on 14 October 2008. Thereafter, the legislation will be subject to the corresponding parliamentary validation procedure. However, it is not foreseeable that the FAAF begins to operate effectively until the Minister of Economy and Finance issues the corresponding developing regulations governing its functioning and the criteria for the selection of assets eligible for purchase are made public.

3. State guarantee on the issuance of bank debt

On 13 October 2008, with the purpose of restoring confidence and the efficient functioning of the interbank money market, the Spanish Council of Ministers authorised the granting of state guarantees on financial transactions carried out by Spanish credit entities. Spanish subsidiaries of foreign entities may also benefit from this type of guarantees provided that they carry out significant activities in Spain, whilst Spanish branches of foreign credit entities are excluded from the scope of this measure. Indebtedness eligible for guarantee includes commercial paper, bonds and notes admitted to trading on official Spanish secondary markets with a maturity of up to five years as well as, where appropriate, interbank deposits as part of a concerted and coordinated plan between the governments of the Eurozone.

Credit entities must meet the requirements established by the Minister of Economy and Finance to have access to these State guarantees, including such special solvency conditions as the Bank of Spain may suggest.

The deadline for the issuance of state guarantees ends on 31 December 2009. In 2008, state guarantees may be granted for a maximum amount of one hundred billion euros, which will be granted by the Minister of Economy and Finance in accordance with the provisions of the General Budget Law and will accrue a fee in consideration for the risk assumed by the Kingdom of Spain.

This measure, together with that described in section 4 below, has been implemented by Royal Decree-Law 7/2008 of 13 October on urgent measures on financial matters concerning the Concerted Plan of Action of the Eurozone countries which entered into force on 14 October  2008, coinciding with the date of its publication in the Official Spanish Gazette, without prejudice to its corresponding parliamentary validation procedure and the approval of the appropriate implementing regulations.

4. Recapitalisation of distressed credit entities

At its meeting on 13 October 2008 the Spanish government authorised the Minister of Economy and Finance until 31 December 2009 to purchase securities, including preferred shares and cuotas participativas (an equity security available only to Spanish savings banks which does not provide the holder with the right to vote on corporate matters at the entity’s general meeting) issued by Spanish credit entities which require to strengthen their regulatory capital upon the request of such entities. Purchase agreements will be finalised following the issuance of a report by the Bank of Spain. The securities that the Government acquires will not be subject to the limitations established by the legislation for regulatory capital purposes.

This measure, together with that described in section 3, has been implemented by Royal Decree-Law 7/2008.

 

Madrid, October 2008

The information contained in this Newsletter is of a general nature and does not constitute legal advice