Steep asset discounts set for Spain's bad bank: source

Tue Oct 23, 2012 6:29am EDT
 
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By Jesús Aguado

MADRID (Reuters) - Spanish lenders will transfer newly constructed housing assets into Spain's bad bank at an average discount of 52.2 percent of original book value and second-hand housing at an average discount of 47.5 percent, a source with knowledge of the process said on Tuesday.

The steep discounts reflect the worst-case scenario -- a severe economic downturn and continued falling housing prices -- in an in-depth analysis of Spain's banking sector conducted by consultancy Oliver Wyman.

Spain's government is setting up an asset management company, or bad bank, to take on up to 90 billion euros worth of sour real estate assets sitting on lenders' books after a property bubble crashed in 2008.

The bad bank is a condition for Spain to receive up to 100 billion euros in European aid for crippled lenders. In addition, Spain's government may seek a rescue for its public debt as borrowing costs are punishingly high.

Banks will receive capital or government bonds in exchange for property they put into the vehicle, which could take up to 15 years to sell it all off.

"The lenders will have to take additional haircuts of 7 percent compared with the base scenario used in Oliver Wyman's stress test bringing discounts very close to the assumptions used in the adverse scenario," the source told Reuters.

In its stress tests of Spanish banks Oliver Wyman applied writedowns of 45.2 percent on new housing under a base scenario for the economy, and 52.4 percent in an adverse scenario of a 6.5 percent shrinkage of the economy over the next three years.

For second-hand housing, the consultancy projected losses of 40.5 percent in the base scenario -- an economic downturn of 2 percent over two years, followed by a slight recovery -- and discounts of 50 percent in the worst-case.   Continued...