Spain bows to 'bad bank' idea

A protester holds a banner reading "Enough of the banking abuses" during a demonstration outside Bankia HQ in March.

Story highlights

  • Spain ready to create "bad bank" to house assets of teetering financial sector
  • Eurozone finance ministers gather in Brussels in bid to unlock €100B loans for banks
  • Move may assuage eurozone concerns about how to oversee rescued banks

Spain is ready to create a single "bad bank" to house the distressed assets of its teetering financial sector, as it prepares to finalise terms of an EU bailout that is dividing the eurozone and spooking markets.

Eurozone finance ministers gather in Brussels on Monday aiming to agree broad conditions for Spain to unlock up to €100bn of loans to recapitalise its banks, as well as addressing the fraught issue of how the risks are shared in the long term.

After repeated attempts to contain the problems in the Spanish banking sector, Madrid is prepared to establish a sector-wide body if it is a condition of accessing EU aid, Spanish officials said.

Such a move would potentially assuage eurozone concerns about how to oversee rescued banks because it would create a centrally-administered body that would be easier to monitor.

While it is not yet clear who would manage any such entity, or how the bad assets transferred into the vehicle would be valued, the promise would be part of a deal to unlock loans in coming months.

Spain looks for a bank lifeline
Spain looks for a bank lifeline


    Spain looks for a bank lifeline


Spain looks for a bank lifeline 02:37
Open Mic: Spain's bank bailout
Open Mic: Spain's bank bailout


    Open Mic: Spain's bank bailout


Open Mic: Spain's bank bailout 02:23

More contentious is the matter of when and how these loans are taken off Spanish debt, once the eurozone establishes a unified system for bank supervision, based around the European Central Bank.

In what was billed as a critical deal last month, eurozone leaders agreed that their €500bn rescue fund would be able to recapitalise banks directly -- rather than channelling the money through national governments.

The eurogroup meeting in Brussels comes as faultlines emerge over details of that summit deal, which had promised to break the vicious circle of fragile banks and weak sovereigns.

Mario Monti, Italy's prime minister, rebuked "inappropriate" comments about the details from "certain Nordic states" as contributing to market uncertainty.

Earlier, he said Finland and the Netherlands should realise that Italy was managing its debt burden, in a pointed reference to their resistance to using EU bailout funds to intervene in bond markets to lower borrowing costs

Eurozone officials are suggesting Spain would still be liable for losses on the equity stakes in the bank. One senior official also indicated the direct recapitalisation would only cover capital injections to banks that had shed their troubled assets.

Tensions over this issue were highlighted by Wolfgang Schäuble, the German finance minister, describing speculation over direct recapitalisation as "to build castles in the sky". "Right now we have to work with what we have," he told El País newspaper. "Spain does not have a problem with debt, which is lower than Germany."

By contrast, Pierre Moscovici, French finance minister, said "it's very important that we give tangible signals" the summit deal will be "translated into action". "We must . . . move quickly on direct recapitalisation of Spanish banks -- I think that is expected," he added.

The Spanish government has considered the idea of establishing a bad bank several times during its seven months in power, but has dropped it in the past because of the costs of funding such a structure. Luis de Guindos, finance minister, said after European aid for the country's banks was agreed that this had made a bad bank more feasible.

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