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Prime Minister Mariano Rajoy demands each bank raise a 50 billion euro safety net, to boost confidence.
BRUSSELS, Belgium – The city of Valladolid used to be a distant sight on the horizon for travelers on the A-62 highway that cuts through northern Spain.
The construction boom that gripped Spain in the decade before 2008 changed that. Vast new suburbs spread out from Valladolid’s 16th Century heart and now loom over both sides of the highway.
That sort of expansion was repeated in cities around the country until the 2008 financial crisis burst Spain’s housing bubble, leaving new homes empty, the nation’s economy comatose and the banks saddled with an estimated 175 billion euro in shaky property assets.
In its latest move to stop Spain becoming the next euro-zone casualty, the new conservative government of Prime Minister Mariano Rajoy on Friday approved rules for banks, including an order for them to set aside 50 billion euros each to cover toxic real estate assets.
Read More: Germany rejects ECB haircut on Greece.
The banks also have to reveal details of their holdings, and are encouraged to sell off property even at knockdown prices, in an effort to revive the moribund real estate market. Doubts about just how many toxic assets Spanish banks are holding have been scaring off international investors.
“The fundamental idea behind these measures is to boost confidence in our economy and our banking sector, strengthening its credibility domestically and in the international arena,” Soraya Saenz de Santamaria told a news conference in Madrid.
The government is also hoping the measures will lead to more mergers in Spain’s fragmented banking sector, reducing the number of regional savings banks, or cajas, many of which were plunged into deep trouble after years of reckless spending that financed the real estate boom.
Since taking office in December, Prime Minister Rajoy has introduced a 15 billion euro package of budget cuts and plans a major reform next week to loosen up the labor market.
Although the country has the EU’s highest unemployment rate, at 22.9 percent, and the economy is seen contracting 1.5 percent this year, the bond markets appear to be encouraged by the government’s moves, with 10 year bonds yields remaining under 5 percent. In contrast, neighboring Portugal has seen its yields soar to over 18 percent despite its center-right government also pursing drastic reforms to rein-in the budget deficit.