Bad Bank "May Send House Prices Lower" : IMF

 

Spain's bad bank set up to take on €60 billion of toxic real estate assets is likely to set a benchmark for the rest of the market and send house prices lower, the IMF said.

The scale of the purchases by the bad bank, which was today approved by the European Commission, may overwhelm government efforts to protect home values in the rest of the market, the Washington-based IMF said in a report published today.

The bad bank, known as SAREB, will buy foreclosed real estate assets from troubled lenders at an average discount of 63%, Fernando Restoy, chairman of the bank-bailout fund, said last month. Restoy, seeking to head off further writedowns for the financial system, said those prices shouldn't be seen as a "reference" for the rest of the housing market, which is down 30% from its peak.

"Operationalizing this objective may not be straightforward," the IMF said in the report. "Further significant declines are possible" in real estate.

BFA-Bankia, the biggest Spanish bank set to receive European bailout funds, will cut about 6,000 jobs, or more than 25% of its workforce, and lose about €19 billion this year, the lender said today.

‘Large' Risks

The number of monthly housing transactions has fallen about 70% since 2007 as the volume of mortgage lending dropped 87% to €3.9 billion in September.

The prices at which the bad bank buys and sells assets "could also become reference prices for the market, given low turnover in the housing market," the IMF said.

The European Commission should make it easier for Spain to tap another €30 billion portion of funding for its banks to bolster the system against "large" risks in case the economy fails to show a projected slow recovery in 2014, the IMF said. Spain sealed an agreement in July to take as much as €100 billion of aid from Europe to bolster banks.

Spain's economy could tumble into a deeper contraction should officials push through the deleveraging of the banking system too quickly, sucking credit out of the economy, or if the EU forces the government to meet its budget deficit targets, crimping domestic demand, according to the IMF.

"The various headwinds noted above could prove stronger than envisaged, leading to a vicious circle of lower growth, fiscal overruns, damaged confidence, higher interest rates, and tighter credit," the report said.