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Spain to create bad bank later today

Source: Reuters - Fri 31st Aug 2012
Spain to create bad bank later today

Spain will create a bad bank today that will need to pay Spanish banks enough for their sour assets to make them viable without saddling the state with too much of the debt.

The clean up of Spain's banks, saddled with 184 billion in bad debt and repossessed property after the property market crashed in 2007-2008, has been central to the deepening euro zone debt crisis.

PM Mariano Rajoy's cabinet will decree the framework for the bad bank - which is to be managed by the country's central bank and bank restructuring fund - as well as other new rules giving the government more power to take over ailing lenders.

All the measures are needed to comply with the conditions of a European rescue of up to 100 billion for the Spanish banking system.

Although a memorandum of understanding signed with the EU for the bank rescue indicated that all sorts of bad loans and sour assets could go into the bad bank, a government source and a parliamentary source who have seen the draft decree told Reuters that only repossessed real estate and loans related to the property sector would be transferred.

Another source, from the property sector, said that at least 67 bln in assets would go to the bad bank, and that appraisals and transfers of the assets could take up to 2 years.

The Spanish bad bank will hope to repeat the success of its Irish equivalent, known as NAMA, which paid 32 billion for property assets that had an original value of 74 billion, implying a discount of more than 56%. Two years after it was formed, the NAMA has begun to generate profit.

The decree creating the bad bank will go into effect immediately, but still needs to be approved in Spain's Parliament, where the PP have an absolute majority.

There had been speculation that an international asset manager firm would run the bad bank but the sources, and an analyst, said it would be the central bank in the end.

"The Bank of Spain will define which risky real estate assets are transferred to the bad bank, and how," said Enrique Martin, a partner with International Financial Analysts, or AFI, an independent think tank.

The real estate sector source said that the Bank of Spain was likely to use established appraisal procedures in Spain to determine market value and then apply a discount due to the fact that housing prices are expected to continue to fall in Spain.

Banks have already been forced to recognize steep losses on the assets and loans under 2 decrees passed earlier this year.

If they are forced to recognize even more losses they would have to recapitalize, so Spain is trying to avoid applying too enormous a discount to the assets when they go to the bad bank.

Housing prices have already dropped an estimated 20 - 30% since the property market crash, and real estate experts do not expect them to stabilize until 2014 or 2015 or even later, which means the bad bank may have to hold on to property for a decade or more to sell it at a profit.


Spain's regional lenders, or cajas, are most heavily exposed to the bad property assets and some have already needed bailing out by the state. In contrast, listed international banks Santander and BBVA have come through the crisis without substantial damage.

It was still unclear whether banks will be paid cash, government bonds or receive a small stake in the bad bank, in return for the assets they transfer, or how any profit from the sale of the assets would be divided. The memorandum of understanding leaves those points wide open and the draft decree apparently does not provide detail.

According to El Pais newspaper, which said it had obtained a draft of the decree to be approved tomorrow, the bad bank will be a corporation that will have the power to buy and sell all types of assets and to issue debt.

The memorandum of understanding says the valuation of the assets should be a real economic value in the long term, but it's not clear how that will be established given housing prices still have more room to fall.

"What will be decreed tomorrow is the outer shell", a lawmaker from the People's Party told Reuters. "The details will come in the next few months, but what is clear is that the prices the banks will receive for the assets will allow them to be viable and there will be no cost for the taxpayer".

However, the fund will be set up with funds from the banks rescue, that can be paid back once it enters profit.

The banks have struggled to unload any of the repossessed property they hold, and some property market experts anticipate that professional management of the assets will reactivate the moribund sector.

The Bank of Spain and the government's bank restructuring fund, or FROB, are expected to contract international asset management firms to help find investors, as well as lawyers, consultants, auditors and property appraisers.

"There are international funds that have been waiting 18 months trying to close deals, but they didn't complete them because of prices. The price that is set to transfer assets to the bad bank will be key in spurring the market," said Angel Serrano, general director of the Spanish office of Aguirre Newman, an international real estate consulting firm.

"It can't become just a parking space for real estate. There has to be an active management, promotions both of commercial and housing property," he said.

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