Wednesday, October 3, 2012

Transfer issues will plague Spanish bank bailout

The Spanish bank bailout process still lacks sufficient detail - after months since the announcement (see discussion). Here is the latest:

1. The so-called “Bad Bank” will use 10% equity injection and 90% guaranteed by the Spanish government to “buy” assets from the banks. It means that Bad Bank bonds will be “exchanged” for problem assets.

2. In turn Spanish banks will be able to use these government guaranteed Bad Bank bonds (which they got in exchange for distressed assets) as collateral at the ECB to access more funding. That means that the ECB'a balance sheet will grow further.

3. Private participation is expected in this program, particularly for the healthier institutions. Spain expects some 55% private participation – wishful thinking given that foreign investors are staying away.

4. Assets to be transferred include:
CS: - i) Performing and non performing developer loans, (ii) Foreclosed and Reposessed Real Estate assets and (iii) The equity stakes on Real Estate companies – but small loans/assets will be excluded (below €100,000 for assets and €250,000 for developer loans).
5. Transfers to start before year-end (Dec 1st).

6. The biggest unresolved issue however is the determination of the transfer price. The official statement on valuation is completely vague: “an economic value determined in a detailed valuation process, which will allow the participation of private investors”. Transfer price problems were the reason the original TARP proposal failed in the US. And improper transfer pricing also created later problems for the IBRC, the Irish version of Bad Bank (resulting in tremendous losses for the taxpayers). If assets are really moved at levels that could be cleared in the market, the bank losses could be materially higher than estimated. To bureaucrats in Spain this represents details that will be hammered out later, but if they want the private sector to participate and the government to avoid further "bleeding" via Bad Bank losses, the transfer valuation issue needs to be on top of the agenda.

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