Spain Creates Its Own "Bad Bank" in a Bid to Avoid Bailout


The Spanish government has released plans for a bank where toxic property assets can be dumped, the so called "banco malo". Spain's financial crisis was caused largely by overinvestment in the housing market, and it is hoped that with a shared pit to dump their bad assets in Spanish banks will have a better chance at recovery. It is hoped that this deliberately created "bad bank" will not be a net loss to Spain, and the Spanish government is asking investors to own a majority stake in the planned bank.

It will be months before the actual bank is up and running (Reuters is reporting it could be late November or early December). Well before then Spain will come under increased pressure to accept a sovereign bailout, Greece could see its situation worsen, and the Germans could demand further reforms and austerity conditions from countries in need of assistance.

Representatives of the troika (European Central Bank, European Commission, and the International Monetary Fund) are expected to release their findings on reforms Greek officials were told they would have to implement in order to receive additional bailout funds soon. It is likely that the Greeks have failed to implement the necessary reforms or cut enough spending.

Portugal recently received a visit from troika officials, something that shouldn't fill anyone with optimism. How the markets react when Portugal and Greece deteriorate further will weigh heavily on Spain.

On September 12 the German Federal Constitutional Court will rule on the constitutionality of the European Stability Mechanism, the main bailout fund for the eurozone. Although most think that the court will rule in favor of the constitutionality of the bailout fund there will almost certainly be austerity conditions attached to any more bailouts that Germany takes part in.

Even if a Spanish "banco malo" were to work the unfortunate reality for the Spanish is that their economy is not in a bubble. September is going to be a tumultuous month for the eurozone, and Spain will be affected by troika's findings on Greece and the ruling of the German Federal Constitutional Court. It is not only European policy that will affect Spain and the viability of their new bank. In a speech today Fed Chairman Ben Bernanke said, "The Federal Reserve will provide additional policy accommodation as needed." Whatever Bernanke was hinting at it will almost certainly ripple to Europe. How bad things will be in Europe when Bernanke decides to act will depend largely on how many reforms Greece has managed to implement and the findings of the German Federal Constitutional Court. 

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  1. The Spanish government has released plans for a bank where toxic property assets can be dumped,

    How the hell is this supposed to work? A bunch of government money injected to cover the losses?

    1. Sort of a, uh, toxic asset relief program.

    2. That’s exactly what I was wondering. Who would buy that debt? How will they paper it over? More importantly, what could possibly go wrong?

    3. I think they put them all in a sealed containment facility in the desert and hope that no one ever finds it. Or dump it off the coast of Somalia, I guess.

  2. ?Me encanta el pozo de dinero!

  3. They want private investors for a bank designed to pay way more money than some nearly worthless assets are worth?


    1. They have to be priced so that BancoMalo can plausibly make a profit on them.

  4. Can I create a ‘bad bank’ for myself – just a place to drop off a few bad stock picks, that car I once bought with the bad transmission, and my collection of 80s music?

    1. “collection of 80s music”

      Give me that.

  5. Seems to me their biggest problem with the idea is market saturation. If Spain’s so bad off, they already have enough bad banks with private investors. Why do they need another one?

    1. Three words: Resolution Trust Corporation.…..orporation

      Looks to me like that’s what they’re building, and that isn’t the worst possible strategy to deal with this mess.

      No, it doesn’t fix all their problems. It won’t solve all of their problems, and what it does fix, it wont’ fix overnight.

      But it’ll help get the ball rolling, and it represents the opening of a long term solution to a lot problems.

      We may have to do something similar with GM someday. It’s better than the government holding all these toxic assets directly.

      1. the Spanish government is asking investors to own a majority stake in the planned bank.

        The 3 words I was thinking of: Prisoners Of Love.

        As in:
        You now own 52% of Bankia.
        You now own 61% of Bankia.
        You now own 55% of Bankia.

  6. Shitibank was taken?

    1. Awesome. Going to start using that now.

  7. OT, but this is funny: Apparently, according to Politifact, a factory that is still open and making products is “effectively closed”:…..lant-open/

    “The plant was effectively shut down on Dec. 23, 2008, when GM ceased production of SUVs there and laid off 1,200 workers. (Several dozen workers stayed on another four months to finish an order of small- to medium-duty trucks for Isuzu Motors.)”

    Wrap your brains around THAT.

  8. How does this make any sense unless the banks are getting overpaid to dump bad assets into the bank? They could write off worthless assets already. They just want somebody else to book the loss. I’m sure this deal only makes sense If the Germans will be paying for this.

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