The Spanish government has decided to go ahead with the creation of a financial vehicle known as a "bad bank" in order to split off toxic real estate assets, primarily associated with homes, from the balance sheets of ailing banks.
The mechanism will attempt to recapitalize the financial sector and is a part of a Stability Program approved by the Cabinet and submitted to the EU. In this document, one of the measures is an outline of how to begin splitting up the banks' real estate assets.
But the formula for how to split off toxic assets remains a mystery, and the Cabinet and the Bank of Spain disagree about how the mechanism should be employed.
After the bad bank mechanism was ruled out at first due to differences between government members, doubts about the current state of Spain's financial system made it necessary to revive the project. Doubts continue to escalate as it becomes clear that current reforms enacted by the Ministry of the Economy have come up short and have not solved the country's problems.
The Spanish government decided that it is fundamentally necessary to build a bad bank, but there is wide disagreement about how they are going to build it. One side, led by Luis De Guindos, wants a pragmatic solution. The other, led by Cristóbal Montoro, wants something more political. The stalemate is impeding the start of this project for now according to sources close to the process.
Mechanism might be delayed until autumn
While some defend the need for a rapid and effective cleanup of the financial sector, others are more worried about how the markets are going to receive a measure like this. Either way, the mechanism could end up costing the Spanish government money.
There is also disagreement about what model to follow: German, Irish, Swiss?
What the solvent banks think
People also disagree about whether the bad bank ought to be voluntary or not. The Cabinet and the Bank of Spain disagree about this point. Some defend what biggest banks and those that are most solvent want. These solvent banks are lobbying for a voluntary mechanism, because they don't think all banks need to be lumped together if they aren't all in the same fragile position.
