Spain’s Rajoy Opposes Creating ‘Bad Bank,’ Favors Mergers

Opposition leader Mariano Rajoy, the favorite to win Spain’s Nov. 20 elections, said he doesn’t support creating a “bad bank” in Spain and that another round of mergers is needed in the financial industry.

“I am not in favor of creating any bad bank,” Rajoy said in an interview with Cadena Ser radio station. “I am in favor of more groupings of financial companies such as those that have already come about and that we have the number of financial companies that can fulfill their role of giving credit.”

Rajoy’s People’s Party has said it will make the “clean-up and restructuring” of the finance system a priority while senior figures linked to it, including Luis de Guindos, a former PP deputy finance minister, say they back stricter rules on how banks account for depreciated land values.

Some analysts and bankers, including Juan Maria Nin, chief executive officer of CaixaBank SA, Spain’s fourth-biggest lender, say they’d favor a so-called bad bank in which the government would acquire damaged real-estate assets to free up balance sheets, allowing more lending. Spanish banks have 176 billion euros ($237 billion) in “troubled” assets linked to real estate, equivalent to more than half of their risk associated with the industry, according to the Bank of Spain.

De Juan’s View

Aristobulo de Juan, a former head of banking supervision who helped tackle a banking crisis in the 1980s that caused the collapse of more than 50 banks, today added his voice to the debate on how to deal with real-estate assets in a column in Expansion newspaper.

De Juan wrote that estimates from Banco Bilbao Vizcaya Argentaria SA that banks may face a further 60 billion euros in unprovisioned losses may be far short of the mark because of “systematic refinancing” of bad loans.

The best course would be to use the deposit guarantee funds as a “bad bank” that would absorb real estate losses with the costs shared by the Bank of Spain and lenders, he said.

Such a solution is “as obvious and as simple as the egg of Columbus,” he wrote. The “egg of Columbus” is a Spanish term for a brilliant idea that seems simple after the fact and refers to an episode in which the explorer Christopher Columbus achieved the difficult task of making an egg stand on its tip by first flattening the tip on a table.

To contact the reporters on this story: Charles Penty in Madrid at cpenty@bloomberg.net; Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net

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