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Bank of Spain does not rule out creation of bad bank

Source: Reuters - Fri 2th Dec 2011

All possibilities are open regarding the reform of the country's banking sector including the creation of a bad bank, Bank of Spain Governor Miguel Angel Fernandez Ordonez said on Thursday.

Wholesale money markets have been largely closed to Spanish banks since the summer as investors shun lenders exposed to a deepening euro zone credit crisis, leaving many banks struggling to meet their funding needs.

Spain's incoming centre-right government is considering ring-fencing toxic real estate assets from a property boom and subsequent crash to relieve banks' balance sheets, but have little recourse to funds to support such a structure.

The financial crisis rocking the European Union may worsen in the coming months, and all ways of tackling the funding crisis facing the banks must be considered, Ordonez said.

"One must be open to all solutions that could improve the situation," he told reporters at an event in Madrid. A bad bank could take many forms, he said.

Minimal public funds should be used in any banking system reform, he said.

The government will struggle to find money to fund any bad bank. Treasury borrowing is prohibitively expensive, and Spain is reluctant to spook markets further by increasing its debt load to fill any capital hole in the banking system.

Private investors remain elusive. High-ranking members of the People's Party, who swept into power in a parliamentary election earlier this month, met international investors on Thursday in the hope of attracting private capital to Spain, a source close to the meeting told Reuters.

A drive to get private equity investors to buy stakes in Spain's unlisted regional banks earlier this year met with limited interest.

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