MADRID: Spain's Prime Minister Pedro Sanchez on Monday welcomed plans for a proposed merger of lenders Caixabank and state-owned Bankia, saying it should be good for the Spanish economy and calling on the sector to consolidate further.

The two Spanish lenders announced on Thursday that they were in merger talks to create the country's biggest domestic lender with total assets of more than 600 billion euros, with sources saying they aim to reach a deal within days.

"Given the reception it has had ... I think there is a good basis for this to be a positive operation for the Spanish economy," Sanchez said in an interview on TVE, after news of the planned merger boosted both lenders' share price and was praised as a way to cut costs.

"From the perspective of size, the Spanish financial sector has to take steps forward," he added.

The 2008 financial crisis shattered Spain's banking sector, prompting mergers that saw the number of major lenders drop to 12 from 55, but Spanish and euro zone regulators have regularly urged banks to go further as a way to cut costs.

Sanchez said, however, that the process was not over yet and that the government would look closely at the proposed conditions of the deal, with the aim to maximize the value of the state's stake in Bankia.

One key questions will be the 22.4 billion euro state rescue Bankia benefited from in 2012. It has so far returned only 3.3 billion euros.

Analysts have said over the past days that it would likely be easier for the state to get its money back if the merger went ahead, as it would be a bigger entity.

BAILOUT

The all-share deal is still being finalised, but based on Thursday's market capitalization, the state's 61.8% stake in Bankia could fall to around 14% of the new entity, while Caixabank's foundation, its main shareholder, would have around 30%, sources told Reuters.

Little is known yet on what a merger deal would look like, but it would in any case be expected to lead to hefty job cuts and possibly kick off a new wave of industry consolidation. .

"Efficiency gains may take time to materialise and require significant restructuring costs, hitting profitability at the outset," Moody's analysts said in a note on Monday.

"Given the depressed macroeconomic outlook for the Spanish economy, execution risks are high, although somewhat mitigated by the complementary nature of both banks' business profiles and their strong track record in previous transactions."

The deal could also reignite tensions within the Socialist-led coalition government as the left-wing Unidas Podemos party has in the past floated the idea that Bankia should remain state-controlled to better serve the interests of taxpayers.