Bloomberg News

Spain’s Rajoy Said to Ask for Proposals on Creating Bad Bank

November 27, 2011

Nov. 25 (Bloomberg) -- Spanish Prime Minister-elect Mariano Rajoy has asked for at least two papers from academics on how to create a so-called bad bank, according to two people with knowledge of the matter.

Both proposals outline mechanisms for a state-backed agency to buy soured assets such as real estate from banks at a discount, said the people, who declined be named because the process isn’t public.

According to one of the proposals, Spain needs external financing of about 100 billion euros ($133 billion) to absorb the cost of transferring assets to the bad bank and should seek it from the European Financial Stability Fund or the International Monetary Fund, one of the people said. Both options call for valuations of real estate to be made by independent appraisers, the people said.

The People’s Party, which won the Nov. 20 general elections in Spain by a landslide, has pledged a “cleanup and restructuring” of the country’s banking system to help restore the supply of credit in an economy where lending is shrinking at its fastest pace on record. Spanish banks, burdened with 176 billion euros of what the Bank of Spain terms “troubled” assets linked to real estate, are fighting to preserve profit as lending slumps and their cost of financing surges.

Real-Estate Issue

Rajoy hasn’t been specific about how he’ll make banks deal with real estate on their books. His electoral program said his government would make it easier to “actively manage” the industry’s impaired assets so that they can be sold off.

Rajoy said three days before the election that while he favored more “groupings” of lenders, he didn’t support the idea of a bad bank. A PP spokeswoman, who declined to be named in line with policy, said yesterday the party had nothing to add to what it said in the electoral program.

Still, Faes, a Madrid-based research institute that is linked to the PP and chaired by former Prime Minister Jose Maria Aznar, favors creating a bad bank, Jaime Garcia-Legaz, secretary general of the organization, said in an interview on Oct. 24.

Luis de Guindos, a former deputy finance minister under Aznar, said in an interview he wants to “eliminate all doubts” about valuation of real estate on the balance sheets of banks.

Fallout Debate

The 52 percent of the more than 300 billion euros of assets linked to developers that the Bank of Spain deems to be “troubled” dwarfs other risky assets held by the industry such as the combined 13 billion euros banks own of Greek, Italian, Portuguese and Irish sovereign debt. Banks may face more than 60 billion euros of losses they haven’t covered with reserves as the economy risks tipping back into a recession, Banco Bilbao Vizcaya Argentaria SA’s research department said in a Nov. 8 report.

The debate about how to tackle the fallout from the collapse of Spain’s 10-year real-estate boom has been playing out in the opinion columns of the country’s newspapers.

Aristobulo de Juan, a former head of banking supervision who helped tackle an industry crisis in the 1980s that caused the collapse of more than 50 lenders, said in a Nov. 17 column in Expansion that he favored using deposit guarantee funds as a bad bank that would absorb real-estate losses with the costs shared by the Bank of Spain and lenders.

--Editors: Stephen Taylor, Dylan Griffiths

To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net Emma Ross-Thomas at erossthomas@bloomberg.net Sharon Smyth at ssmyth2@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net Frank Connelly at fconnelly@bloomberg.net Andrew Blackman at ablackman@bloomberg.net.


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