Spain is reluctant to create a state-backed bank to hold toxic real estate assets from a burst housing bubble while it fights to bring down its deficit, preferring individual institutions to shoulder the risk. But the government will come under increasing pressure to underwrite a capital shortfall in its financial system in a country struggling to emerge from recession and with little sign of private investor interest in its sell-off of regional banks.
Spain, the euro zone’s fourth biggest economy, is desperate to avoid taking on more debt as it seeks to distance itself from fellow euro zone members like Greece and Ireland who are seeking better terms for their huge international rescue loans. “The bad bank from the government’s point of view would mean that they are taking a loss,” said Silvia Paternain, lawyer at Freshfields Bruckhaus Deringer in Madrid.
Ireland’s bad bank, NAMA, was set up in 2009 and bought real estate assets from banks at a discount in exchange for bonds.
It thought 40 percent of the loans it was acquiring were income producing but the actual figure was 25 percent. The discounts it demanded triggered huge holes on banks’ balance sheets that had to be filled by the government.
This month, NAMA took a one billion euros charge to cover potential losses from the loans it has acquired, sending its fourth-quarter loss up to 678 million euros.
“I think, very rightly, the government has no intention of creating a bad bank,” said Luis Arenzana, managing partner of Shelter Island Capital Management in Madrid. “The case of Ireland proves it’s a terrible idea.”
Spain’s Socialist government may also be unwilling to close down non-performing regional banks one year ahead of general elections, as any sign of attacking the ‘cajas’ may cost it votes in Spain’s powerful, autonomous regions.
“It’s all riddled with bad politics, and with the pretext that you have to keep the banking system going,” said Pedro Schwartz, economist at San Pablo University in Madrid, adding the worst performing cajas should be allowed to fail.
Spain has already poured around 10 billion euros ($14 billion) into a forced consolidation of the fragmented unlisted savings banks which account for around half the banking system.
The central bank has estimated the banking system has a 15 billion euros capital shortfall, not taking future losses on real estate into account.