Rajoy has confirmed that there will not be a "bad bank" set up in Spain. With regard to real estate assets that are a burden on bank balance sheets, it looks like the government will have banks raise their provisions, forcing them to sell off assets and cut losses. This move will unleash a series of mergers designed to liquidate extra inventory in order to de-leverage and face stagnating growth.
That said, the strategy entails a serious risk of merging healthy firms with unhealthy ones and further spreading contagion throughout the system. And what do we do with the homes? That is what a bad bank would be useful for.
Can we create a better strategy? For now, the ideas offered by the Spanish government are proposing a cleanup of assets, something that will be a challenge for renewing the credit markets. We should think long and hard about this reform.