Foreign banks resist losses on Spanish motorway rescue

* Foreign banks don't like proposed 50 pct forced loss

* Talks with government drag out any bail-out

* Cash-strapped Spain reluctant to take on bulk of loans

By Sonya Dowsett

MADRID, Oct 1 (Reuters) - Foreign banks are dragging out a2.3 billion euro ($3 billion) rescue plan for bankrupt Spanishmotorways, seeking better terms to recoup more of the money theylent the nine toll road companies, three sources said.

Under the plan, the motorways would be nationalised but thegovernment is desperate to avoid taking on the bulk of debtlinked to the road projects which amounts to more than 4 billioneuros.

Instead, the banks would be forced to take losses on theloans, known as a "haircut", meaning the government would assumeresponsibility for a smaller debt at a time when it is underpressure to bring its budget deficit within strict EuropeanUnion targets.

Spain is barely out of a national debt crisis but, with aneye on parliamentary elections due next year, the governmentplans to cut taxes, further straining its finances.

Domestic banks have largely accepted the terms of thebail-out, banking sources said. But a sticking point for theforeign creditors is the government's proposed 50 percenthaircut on their loans to the road operators which went bustafter failing to attract enough traffic during the recession.

"The talks are still going on. The foreign banks are pushingfor better conditions. It's like they're putting the screws onat the last minute to see if they can get more," said anothersource with knowledge of the talks.

Traffic has fallen by more than a quarter on Spain's tollroads in six years of economic downturn, official figures show.Flow on the bankrupt highways which mostly radiate from Madrid has dropped further still as many have toll-free roads runningin parallel.

Most banks and companies have already made provisions forthe losses, sources said. Some of the foreign investment bankshave approached law firm Linklaters for legal advice, twosources said without naming the banks that had taken this step.

Linklaters declined to comment.

The government held meetings with all the internationalbanks, which together account for around 40 percent of theroads' debt, at the beginning of September to try to reachconsensus, one source with direct knowledge of the talks said.

International banks seeking better terms include RBS, ING, Commerzbank, Lloyds and HSBC, the source said. BNP Paribas alsohad investments in the roads, another source said.

These banks declined to comment publicly. HSBC did notrespond to requests for comment.

"We have not accepted the terms offered by the Spanishgovernment, in line with many other foreign banks that haveunified on this," said a source at one of the banks, who spokeon condition of anonymity.

The government would not name the banks that had invested inthe roads. It has grouped the liquidation proceedings of thenine roads in one Madrid court action, three sources withknowledge of the matter said.

Spanish media reported earlier this month that BancoEspirito Santo, Societe Generale, Dexia, Deutsche Bank and Credit Agricole were also among the international creditors.

Deutsche Bank and Dexia declined to comment. The others didnot respond to requests for comment.

SQUEEZED

Under a Spanish law drawn up over 40 years ago, the state isliable for the cost of the land and construction of privatemotorways if they go bust. The government declined to comment onthe talks, beyond saying it was still working on a solution.

Builders including Ferrovial, Abertis, OHL, ACS, FCC and Acciona created joint ventures to win concessions from the government tobuild the toll roads during Spain's boom years.

The domestic creditors include Santander, BBVA, Bankia, Caixabank, Sabadell and Popular, banking sources said.

Santander, BBVA, Caixabank, Bankia and Sabadell declined tocomment. Popular was not immediately available to comment.

Barclays has also lent to the highways, but willtransfer the debt to Caixabank by the end of the year as part ofan August deal to sell its retail and corporate bankingoperations, three sources with knowledge of the matter said.Barclays and Caixabank declined to comment.

Banks hold debt linked to the failed motorway companies ofaround 3.9 billion euros, with a further 470 million of debtwith builders. The maximum hit for the deficit would 3 billioneuros, the government has said.

Spain has said it will reduce its deficit to about 3 percentof GDP by 2016, implying around 35 billion euros will have to befound from end-2013 to end-2016 to meet the target.

The government is in parallel talks with Brussels to ensureany solution does not entail state aid.

Spain wants to create a state company to house the failedtoll roads, forcing a 50 percent loss on the banks and payingthe rest via a 30-year bond with a coupon of 1 percent plus avariable factor linked to the traffic flow on the roads.

"The government is squeezed between honouring itsobligations with investors and explaining to citizens why it'scutting back on spending for health yet bailing outprivately-owned motorways," said Mikel Echavarren, head ofMadrid-based real estate consultant Irea.(1 US dollar = 0.7877 euro) (Additional reporting by Robert Hetz, Julien Toyer and StefanoBerra; Editing by Julien Toyer and David Stamp)