El Ministro de Economía, Luis de Guindos
The rescue for the Spanish banks will not only be done through capital injections. The overprice that the ‘bad bank’ will pay for the so-called toxic assets - which will be acquired above the market price, as revealed by El Confidencial - will be included in the rescue.
In other words, the capital needs of each entity will be estimated and then injected through stocks, so-called CoCo bonds (contingent convertibles) or through the transfer of assets to the new entity - the bad bank - that will manage these assets.
“According to Brussels, any payment that is done above market price is considered aid to the state, so the overprice at which the bad bank will buy the assets will have to be included in the €100bn rescue package,” according to sources informed about the recapitalization process of the Spanish banking sector.
The bad bank will purchase toxic assets at the so-called “long-term economic value,” which is the estimated value that it will have reached within a maximum of 10 years.
Expected long-term market value
This estimated, long-term value is higher than the market price for many assets, especially for the least liquid assets, such as real estate assets, where the current values are at extremely low levels given the lack of demand, and they reflect the expected market value in medium- and long-term.
The long-term value will be determined by the independent analysts under the supervision from Brussels and the International Monetary Fund, which has been invited to participate as advisor during the whole process.
This value will depend on the types of assets and the maturing process in order to sell them later. This method aims at avoiding a scenario where the entities will have to assume all potential losses that were not covered by provisions.
According to the consulted sources, it does not matter whether it is done one way or the other. If the banks would sell their assets to the bad bank at market price they would have to assume these extensive losses that would ‘eat up’ their capital, which would mean that the capital injection by the European rescue fund – through stocks and CoCo’s – would also have to be larger. If they are sold at a higher price, the required capital injection will be smaller, but the overprice will also be considered part of the rescue.
Financing the bad bank
Another question is how the bad bank will finance the purchase of these assets. Apart from the state money, it will have a capital – where, apart from the Spanish state-backed bank fund (the FROB), private investors could also enter –and it could emit bonds on the markets that, in turn, would be discounted by the European Central Bank. It would make investments more attractive among financial entities in the Eurozone.
The interest rates on this debt would depend on whether it is only supported by the FROB (that is, the Spanish state) or also by the European rescue fund.
As reported by El Confidencial on Monday, Brussels has rejected the option of letting the nationalized banks take care of the management of the assets of the bad bank, and instead it is considering putting it out to tender among independent firms.
This article was translated and edited by Stina Lunden.
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