Spain's government made a further attempt at solving its economic crisis Friday when it approved a new package of measures to create a "bad bank" to handle the country's toxic property investments and give the central bank more powers to shut down troubled lenders.
The reform is the fifth such package Spain has introduced since its financial difficulties began in 2008.
Economy Minister Luis de Guindos said the new "bad bank" would be up and running by the end of November and will be controlled by the central bank but would also involve the private sector.
He said the measure was chiefly aimed at unburdening banks of their bad investments so they can concentrate on managing people's savings and investments and get credit flowing again into the ailing economy. The bad bank would be able to bring some of the real estate assets — such as unused land and unsold houses — back onto the market.
The reform comes as Spain battles to convince investors it can handle its finances and avoid following Greece, Ireland, Portugal and Cyprus in requesting a government bailout
Spain's banks have an estimated 184 billion euros ($232 billion) in problematic real estate loans and investments following the collapse of the country's property market in 2008. Concerns about the sector pushed Spain in June to accept a 100 billion euro loan from the other 16 countries that use the euro to spend on rescuing banks.
De Guindos gave no indication as to how much or what type of toxic assets the new bank would take on or at what discount they would be bought from the troubled banks. The creation of the bad bank was among conditions of the eurozone's loan package.
The Minister did say the new institution would have between 10 and 15 years to sell off those assets and the Bank of Spain would decide the value of the toxic assets.
"We're laying the basis to avoid a repetition of such a crisis in the future," the minister said at a news conference after a Cabinet meeting.
De Guindos said that given that the new entity would only be dealing with those banks that have been bailed out, it would be managing a figure considerably smaller than 184 billion euros, though he declined to say how much it would amount to. So far, eight banks have been taken over.
Analysts were not immediately impressed and said the reforms were short on detail.
"The reform is a step in the right direction but there is still a lot to do," said Carles Vergara, Professor of Financial Management at Barcelona's IESE Business School.
"There are several elements still in the air, especially with regards to the bad bank; the value of the assets and which entities are viable and which are not," he said.
Javier Flores, an analyst in Spain with Asinver investment group said it was still not clear what methodology would be used to establish the prices of the assets.
"Information is lacking and once again it appears to be a half-baked reform," he said.
Flores said he was not convinced by the government's insistence that tax payers would not end up footing the bill and added that, in that case, the reform could prove to be another step toward an eventual bailout.
Spain's "bad bank" will be the eurozone's second — the first was set up by Ireland in 2009.
However, Irelands' National Asset Management Agency or NAMA, has not been the success it was billed to be as soaring bank-rescue costs ruined the country's creditworthiness and forced it to negotiate an EU-IMF loan rescue in November 2010.
NAMA paid its banks just 30 billion euros ($38 billion) in government-backed bonds for assets originally valued at 74 billion euros, forcing the banks to record 44 billion euros in loan write-offs — which led to more rescues.
By 2011, NAMA reported a profit of 247 million euros as it cashed in some of the best of the property it seized from the U.K. and the U.S. But the state-owned agency plans to hold most Irish properties and development sites for up to a decade in hopes that the market will rebound first. It originally envisaged a 1 billion euro profit over its expected decade-long lifetime, but now says a break-even is more likely. Analysts expect losses.
De Guindos said Spain's new institution would be financed mostly by private investment with additional money from Spain's bank restructuring fund, or FROB. He said only a small amount would come from the eurozone aid package.
De Guindos also announced the Bank of Spain would be given greater powers to intervene in earlier — and close down if necessary — banks with financial problems. The central bank would be able to intervene in banks that meet solvency requirements but are uncertain of fulfilling them in the future.
He said that in line with European banking rules, the government was raising the core capital requirements — the level of high-quality assets a lender has to hold to protect it from economic shocks — to 9 percent for all banks.
Results of a comprehensive audit of all Spanish banks are expected next month.
The reforms comes as Spain got yet another dose of bad news Friday as the Bank of Spain reported a net capital outflow of 56.6 billion euros in June, topping an exit of 41.3 billion euros in May.
It said the outflow for the first six months of 2012 was nearly 220 billion euros, compared with an intake of 22 billion euros for the same period last year.
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