The sooner the better

The financial reforms approved by the government have so far been ineffective and frustrating. Ineffective, because the financial markets still distrust the solvency of Spanish bank assets, a fact apparent both in the ongoing slump of Spanish banks in the stock markets, largely attributable to the perception that Spanish banks have overvalued their real estate assets, and the continual downgrading of ratings applied by international agencies. Frustrating, because the efforts to consolidate bank balances seem interminable. The government has already demanded that banks draw on an additional 55 billion euros to speed up the restructuring of their real estate assets, but several analyses point to the need for another 60 billion or more to consolidate the accounts.

There are a number of reasons behind the failure of the strategy of demanding increasing provisions. Investors consider that the value of the banks’ real estate portfolio is far below what they claim it to be; any higher valuation is seen as an overvaluing or concealment of hidden losses. What’s more, the value of this portfolio falls rapidly as the recession intensifies and the number of bad loans rises. The demand for hard-and-fast provisions is useless as a method of correcting the consequent paralysis.

The International Monetary Fund, aware of the importance of Spanish banking consolidation in order to do away with the inoperative “zombie” banks and reactivate the economy, has proposed that this consolidation be carried out with public money, and is not ruling out the creation of liquidation companies that would take over the real estate assets of the Spanish banks. The IMF’s statement seems to be a maneuver calculated to endorse the input of public money into Spanish financial entities, because the existing Deposit Guarantee Fund does not possess sufficient resources to deal with the cost of a systemic crisis, and because the practice of demanding growing provisions limits the banks’ capacity to grant loans.

The option of segregating the real estate assets in liquidation companies (the so-called “bad bank,” but without a banking license) is a respectable solution, but demands a high level of clarity when it comes to its execution. The most important aspect here is to determine the price when transferring assets from the bank to the liquidation company. The success of the segregation operation will depend on this price. The key will be in finding financing for these companies. If it is public, the price of the migrated assets ought to approximate to zero. The second condition is to minimize the banks’ shareholding in these companies, to prevent the consolidation from affecting the banks’ balances. As has so often, of late, been the case with the Spanish government’s actions, it must do what has to be done, and the sooner the better.