Spain in talks over 'bad bank' scheme

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Story highlights

  • Spain's government, banks discussing plan to clump bad property loans, sources say
  • Country is trying to avoid the need for an international rescue
  • Economists say weak banks still need further recapitalisation of around €100bn
  • IMF has identified two state-backed Spanish banks that are 'vulnerable'

Spain's government and its banks are discussing a new scheme to segregate problematic property loans into one or more asset management companies to relieve the burden on struggling lenders, according to officials and bankers.

The "bad bank" scheme is the latest attempt by the centre-right government of Mariano Rajoy, prime minister, to avoid an international rescue programme of the sort required by Greece, Ireland and Portugal.

Mr Rajoy's Popular party government has deepened fiscal austerity, reformed Spain's labour market and ordered banks to set aside an extra €54bn of bad loan provisions and capital buffers this year.

Ministers had decided they had no need of an Irish-style bad bank. But economists say the crisis is so dire that weak banks will need further recapitalisation of about €100bn.

One option is for a state bailout financed by EU rescue funds, but Spain wants to avoid a blow to its credibility and the strict conditions such aid would entail. In a speech to his party on Sunday, Mr Rajoy reiterated the PP's commitment to painful economic reforms. "Spain needs, and needs urgently, deep structural changes, not window-dressing, in order to grow and create employment."

Government officials insist that the scheme should not be called a bad bank, because it will not be a bank and participating lenders will be able to park assets in it only if they have set aside sufficient bad loan provisions, independently valued.

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That raises the question of how it will help banks trying to raise provisions for other loans and strengthen their capital. One official said it would relieve banks of the burden of trying to sell homes and let them focus on their core business of providing credit to the private sector. Bank executives who favour the idea say it is better than a rescue for the banking system financed by the state or the EU.

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The scheme is being developed by Luis de Guindos, economy minister, and is in line with a recommendation by the International Monetary Fund.

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Last week, the IMF identified two state-backed Spanish banks -- one of them Bankia, a listed group of seven merged cajas or savings banks -- as vulnerable and said they needed to "take swift and decisive measures to strengthen their balance sheets and improve management and governance practices".

In a five-yearly review of the Spanish banking system, the IMF said options for managing impaired assets included "setting up private or public specialised asset management companies".

Some analysts say Spain may have to bite the bullet and accept help from EU rescue funds to recapitalise its banks.