Here's Why Spain Desperately Needs A Bad Bank

spain, youth unemployment, capitalism

Photo: AP

Given the quantity of toxic assets tied to the real estate sector that Spanish lenders have accumulated on their balance sheets, it has been recommended that Spain create a ‘bad bank’ in order to ease the burden on financial institutions so that they can reactivate credit flows as soon as possible in order to contribute to the recovery of our economy.At the end of June, when the last data were published, banks and savings banks together had accumulated more than 130.5 billion euros in dangerous assets.

This volume of outstanding real estate loans that have gone into default or are currently at risk of default during the next few months, or the shares that the lenders have had to keep because of non-payments or in exchange for debt.

The Popular Party, the most likely party to rise in power after the November elections, are prepared to finally clean up our financial system and for that they are proposing a plan to help lenders get rid of these toxic real estate assets.

The program outlines steps that “will finalise the healing and restructuring of our financial system” by facilitating the “active management” of “damaged assets” of financial lenders who needs the assistance.

“These assets will debut in the market with criteria for transparency, concurrency and independent supervision,” added the government.

The banks also are pressured to make the ‘bad bank’ a reality, considering that their earnings are increasingly less because of declines in banking activity and because many of the lenders have ended up making provisions in order to cover losses due to real estate exposure.

Santander and Sabadell are the only lenders that have publicly supported the creation of a ‘bad bank,’ yet they still acknowledge the difficulty around setting prices of these shares because that would lead to unsustainable levels of public debt. Sources close to the populist party maintain that the PP has already held conversations with officials in Brussels who are aimed at soliciting aid from the The European Financial Stability Facility (EFSF) so that Spain could successfully clean up its banking system and reinforce its principle lenders, i.e., those who need more than 26 billion euros in additional capital reserves.

How would the ‘bad bank’ be constructed? According to various sources, it would purchase toxic assets such as home and apartment loans at price near book value. In this way, the lenders could liberate revenues that have served to cover losses.

This amount is estimated to be 30 billion euros, considering that they have covered between 15-20% of real estate sector loans and around 33% of awarded assets. With this money free, the banks could recapitalize and provide new lines of credit to businesses and homes.

This post originally appeared at ElEconomista.

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