Spanish lenders in talks over 'bad bank' plan

Associated Press
A woman leaves a banner after a demonstration against education and health care spending cuts in Madrid, Sunday, April 29, 2012. Tens of thousands of people across Spain are protesting education and health care spending cuts as the country slides into its second recession in three years. With unemployment at 24.4 percent - a Eurozone high - and more than half of Spaniards under 25 years old jobless, Prime Minister Mariano Rajoy's conservative government has introduced stinging austerity measures in its first five months in office. (AP Photo/Daniel Ochoa de Olza)
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MADRID (AP) — As their losses from mortgages grow, Spanish banks have begun discussions about creating a separate entity — a "bad bank" — to take on these assets and relieve pressure on the financial sector.

The goal of the new organization would be to reduce the financial strain on banks and prevent the need for either a more costly government bailout or an international rescue along the lines of Greece, Portugal and Ireland.

The urgency of the issue was highlighted by ratings agency Standard & Poor's, which downgraded the debt of 11 Spanish banks — including Banco Santander SA, the eurozone's largest by market capitalization. S&P cited concerns about the effects of Spain's shrinking economy and warned that five other banks are at risk of a similar downgrade.

An official for the Economy Ministry said Monday that the Spanish banking industry is discussing creating a private organization that would take on lenders' toxic assets.

These assets would include bad loans, such as defaulted mortgage loans left over from the imploded property market. The new organization would also take the burden of trying to sell foreclosed properties off the banks and allow them to concentrate on providing credit to the private sector.

The official, who spoke on condition of anonymity in line with ministry rules, added that the government would not inject any taxpayer money into the creation of such an organization and would only set up rules for how it would work.

Banks would be able to transfer toxic assets only if they had already set aside money to cover losses on them. How far such a system would help the banks is unclear since many are strapped for cash and would need to raise capital to make such provisions.

Ireland, which like Spain suffered the collapse of its real estate market, created such a "bad bank" in 2009. However, it used taxpayer money to buy the toxic assets from the banks at reduced prices.

Adding to concerns about Spain on Monday, the National Statistics Institute announced the country was officially back in recession as of the first quarter, when the economy shrank 0.3 percent compared with the previous three months. The contraction follows a similar decline in the final quarter of last year and puts Spain in its second recession in three years.

The bursting in 2008 of a real estate bubble that powered the economy for more than a decade has saddled banks, particularly the savings banks or 'cajas', with enormous amounts of bad loans. The central bank, the Bank of Spain, says the sector is still burdened with about €175 billion ($230 billion) in "problematic" real estate holdings. There are concerns that, as Spain's shrinking economy takes its toll on the banks, the government and possibly international lenders will be forced to step in and rescue the banks.

The government has already been pushing the lenders to strengthen their finances by merging and has introduced rules that require banks to set aside an estimated total of €50 billion ($65.7 billion) more in provisions by the end of the 2012 to cover their toxic real estate assets.

Spain's has become the focus of Europe's debt crisis as investors worry over its ability to push through austerity measures and reforms during a recession and with unemployment hitting 24 percent — and 50 percent for those aged under 25. Late last week, S&P downgraded the country's credit rating by two notches from A to BBB+, citing a worsening budget deficit, worries over the banking system, and poor economic prospects.

The austerity measures are aimed principally at slashing the government's deficit from 8.5 percent of economic output to below the maximum level set by the European Union of 3 percent by 2013. For this year, the goal is 5.3 percent.

With the economy shrinking, there are concerns that the government will not meet its targets and will be forced to seek a bailout.

Sunday saw tens of thousands people march throughout Spain to protest the conservative's government batch of emergency reforms and austerity measures.

But speaking the same day, Prime Minister Mariano Rajoy said the government would continue to make reforms week by week, claiming the gravity of the situation required this.

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Daniel Woolls contributed from Madrid.

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