The bad bank, previewed in the Memorandum of Understanding (MoU) signed by Spain in order to assure a bailout of its financial sector, will turn into a reality at the end of this year.
Luis de Guindos unveiled yesterday some of the characteristics of the bad bank tool, which is expected to clean up toxic assets owned by Spanish banks. Private-sector participation in the bad bank will be 55%, slightly more than the agreement that establishes the MoU and just enough that 45% of public funds (a maximum of 3 billion euros) will not compute as public debt or deficit. The 55% of public capital will come mostly from insurance companies and healthy Spanish banks. Foreign capital will be sought, though it will be hard to raise.
Evidently, private partners are going to pay close attention to the characteristics of the bad bank. If it won't issue shares of toxic assets whose net value surpasses 100,000 euros in value or property developer debt under 250,000 euros. Many coastal region properties will not go into the bad bank, because they are valuable and salable. The move will attempt to not burden the newly minted bad bank with huge personel and management costs and to subcontract its real estate services.
Still, the most important factor is what is not yet known: how much are these toxic assets really worth? Are they attractive investments for the bad bank? Luis de Guindos has mentioned a conservative price, but it will be difficult to strike a balance between possible lower prices. If prices are too high, taxpayers will suffer. Too low, and the banks will.
