* Bad loans at record highs in August
* Spain may include unrecoverable loans in bad bank
* Price transfer of assets key for bad bank
* Average discount on assets will be above 50 percent
By Sonya Dowsett
MADRID, Oct 18 Spanish households and companies
defaulted on their debts in record numbers in August, hurting
the country's lenders and highlighting the need for an aid
package and bad bank to help the economy out of recession.
A property crash left banks with billions of euros in bad
debt from real estate developers on their balance sheets but the
problems have spread to small businesses and other sectors.
Loans that fell into arrears in August increased by 5.3
billion euros ($7 billion) from July, reaching 178 billion
euros, Bank of Spain data showed on Thursday.
Spain is setting up a bad bank to siphon property assets off
lenders' balance sheets and banks are preparing to receive the
first funds from a 100-billion-euro credit line agreed with the
But the record loan data raises the question of whether
consumer loans should also be transferred to the bad bank and if
Spain will take too little of the European cash. The government
estimates it only needs 40 billion euros.
"The most obvious thing from this data is that the Spanish
government should aim for a greater recapitalisation exercise,"
said Gilles Moec, economist at Deutsche bank.
"There is a risk of undershooting with the recapitalisation
plan as it stands today."
The setting up of a bad bank is a condition of receiving the
European aid, alongside an independent audit of the country's
lenders completed in September which pointed to seven banks
needing capital in a severe downturn.
Spain is also expected to ask for a sovereign aid package in
the next few weeks which would open the door for the European
Central Bank to start buying its debt to bring premiums down.
Spain is suffering its worst economic downturn in half a
century, marked by high unemployment and deep spending cuts.
This has hurt consumers who are now defaulting on their loans in
increasing numbers and this also makes the bank problems worse.
The country has raised the possibility of including defunct
consumer loans in the bad bank, although only in the worst
cases, Economy Ministry sources said on Wednesday.
Bad consumer loans will not be transferred into the bad bank
in the first instance, a source with knowledge of the matter
said, but the bad bank has been designed so that non-real estate
assets could be included in the future.
"At some time in the future they may be included, but it may
never happen," the source said. "What you need to cut out is the
cyst of the real estate sector, that's what the bad bank has
been set up for, that's what has destroyed the banking system."
The bad bank will be designed to hold up to 90 billion euros
of assets, but the government expects the final size to be much
The managing director of the bank restructuring fund (FROB)
Antonio Carrascosa said at a conference in Barcelona on Thursday
that the final size would be around 60 billion to 70 billion
euros implying average discounts on asset prices of 54 to 60
"We consider that in the end the net asset value to be
around 60 to 70 billion euros compared to a gross or initial
value of those assets close to 150 billion euros," Carrascosa
said during the conference.
The bad bank will be up and running by the end of the year.
The Bank of Spain must determine the price at which assets
are transferred to the bank, using input from independent
auditor Oliver Wyman. The price will be set in the week
following Nov. 19 when the legislation governing the formation
of the bad bank is passed.
Prices must be low enough to attract private investors,
meaning the bad bank will be profitable over its 15 year
lifespan, but not so low as to precipitate bigger losses for
WRITEDOWNS SQUEEZE EARNINGS
Economists say getting the banks back to a healthy position
is crucial to Spain climbing out of recession. Most independent
forecasts are looking for a drop of 1.5 percent in economic
output next year, far worse than the government's forecast for a
0.5 percent contraction.
Spain's lenders have already made massive write downs on
their property investments under two government laws passed this
year. The government has forced lenders to set aside 137 billion
euros on 307 billion euros of real estate exposure.
Write downs on property are expected to continue to squeeze
banks' profits in nine-months results. Bankinter, the
first Spanish bank to report results this season, posted a
halving of 9 month net profit due to writedowns made in the
Santander and BBVA, which passed the
independent audit with flying colours, still have more
writedowns to make to comply with the government legislation.