Uncertainty remains over future aid to Spain’s troubled banks

Investors and banks are anxiously waiting for Mariano Rajoy, Spain’s next prime minister, to clarify how he intends to resolve the country’s enduring banking crisis.

Rajoy, the leader of the Partido Popular (PP) which won the general elections earlier this month, has yet to say what his government will do to end the uncertainty about the health of the country’s banks which hold billions of euros of failed real estate and construction industry assets.

Before the elections, he had said he was not in favour of creating a bad bank to absorb the banks’ toxic assets, but that possibility appears to be on the table again after discussions with leading PP officials and academics since the elections.

Rodrigo Rato, a former PP economy minister and currently president of Bankia, the banking group made from the merger of several savings banks, has urged Rajoy to set up a bad bank as the best way to resolve the crisis. According to local press reports, he has urged the incoming government to act quickly to clean up the banks’ balance sheets and warned that failure to do so would continue to hold back credit and that without credit the economy cannot recover.

Opinions differ within the PP on the best solution. Some officials and bankers would prefer to see more mergers among the country’s savings institutions, in a process similar to the creation of the Bankia group. Critics say this would be not resolve the problem, but simply transfer the bad assets to a new entity.

Setting up a bad bank would also be very costly for the government when it is struggling to cut the budget deficit and it has no spare money to pay for the assets.

An alternative could be to sell off the banks, but there are few potential buyers under current market condition dominated by the eurozone sovereign debt crisis, and when the amount of bad assets held by each institution remains unknown.

Cristobal Montoro, who has been touted as the next economy minister, is reported to want the banks to value their real estate assets at current market price and assume the corresponding losses. The government could then provide support for those banks facing solvency pressures as a result.  Whatever the solution, it is likely to be costly, analysts said.

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