Spain Opens Door to Liquidating Unviable Lenders in Bailout

Spain may liquidate lenders that aren’t viable as part of its European-financed overhaul of the industry, Bank of Spain Governor Luis Maria Linde said.

“If an institution doesn’t have the strength to ensure its future, it will have to undergo a process of orderly resolution or liquidation,” Linde told lawmakers today in Madrid in his first testimony to Parliament.

Spain is negotiating the terms of a 100 billion-euro ($123 billion) European bailout for its banks, which are still reeling from the collapse of the debt-fueled real estate boom in 2008. The government hasn’t liquidated any lenders, instead restructuring and selling on the banks it has seized since 2009. Deputy Economy Minister Fernando Jimenez Latorre said on June 13 that closing down banks wouldn’t be the most efficient solution.

The draft memorandum of understanding, the agreement on the bailout that Spain is due to sign with other euro-region nations on July 20, says weak banks may face “restructuring and/or resolution,” leaving open the possibility of liquidation, even without specifically mentioning such a move.

Economy Minister Luis de Guindos told reporters in Madrid today he had no plans to close down any banks. Asked about de Guindos’s remarks, Linde said that by liquidation he didn’t mean “just shutting something down,” and “letting everyone fend for themselves.”

An “orderly” solution would make sure “depositors don’t suffer, senior creditors don’t suffer and that people who shouldn’t suffer don’t suffer,” he told reporters.

The government’s bank-bailout fund, known as FROB, has four banks under its control. The biggest is Bankia group, which helped prompt the European bailout request by seeking 19 billion euros of public funds after it was nationalized in May.

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