Spain’s bad bank may never turn good

Minister Luis de Guindos

The Spanish bad bank Sareb aimed at absorbing impaired assets will be set up rather soon. The idea behind this initiative is to transfer bad loans and foreclosed property to a common pool that would retain those assets until sale prospects look better. A substantial rebate on the transfer price would ensure this scheme doesn’t cost a single penny to taxpayers. Big banks holding significant shares will anyhow make sure this doesn’t happen.

This trick will not prevent troubled banks from incurring in sizeable losses. Dumping damaged assets at a price much below their accounting value and cumulated provisions will entail large own resources imbalances.

For all efforts to avoid public finances from footing the solvency gap, the budget will take the brunt of a massive banking recapitalisation. The more so as further running losses are to be expected in these trouble-ridden entities. Should they be sold ultimately to solvent groups, the State will also have to cope with an awesome bill.

These ailing banks having scarce prospects of becoming profitable enough in future, taxpayers will be unlikely to recover the money disbursed at an early stage.

In making frantic efforts to avoiding losses in the bad bank, there is a clear risk that recapitalisation might go beyond what is truly warranted. If so, troubled entities might be put on a sounder footing than their counterparts, raising deep concerns on fair trading. Thus, the amount of fresh capital to be injected will have to be coupled with strict rules on business downsizing to reduce potential competition conflicts. Trust the European Commission in making sure a balanced outcome is reached.

The bad bank raises another matter of concern. Concentrating all liabilities in a single pool will certainly fail to improve its ability to recover bad loans. Debtors are likely to go strand refusing to undertake any effort to pay back their dues.

The key task of preventing late payers from becoming wholly insolvent is undeniably better performed by the individual bank that awarded and eventually refinanced the credit, than by a centralised pool. Thus, the best course of action the bad bank might take is to commend this duty to specialised entities or to sell them bundles of impaired assets. Otherwise, it might witness a rapid deterioration in its balance sheet, with the risk of incurring in further losses. Taxpayers stand to be losers in all circumstances.


About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.