August 13, 2012 / 9:00 AM / in 5 years

BREAKINGVIEWS-Spain’s bad bank valuation looks ripe for fiddling

(The authors are Reuters Breakingviews columnists. The opinions expressed are their own)

By Christine Murray and George Hay

MADRID/LONDON, Aug 13 (Reuters Breakingviews) - How will Spain value assets earmarked for its euro zone-financed bad bank? The country’s recent 100 billion euro bailout envisages an entity to buy toxic property loans currently gumming up banks’ balance sheets. That sounds like the National Asset Management Agency, bad bank set up in Ireland in 2009. But if Spain uses the same valuation methodology as NAMA – which had been approved by the European Commission - euro zone taxpayers may get diddled.

NAMA’s acquisitions of duff property loans were valued via a series of guestimates. One was the market value of the assets, and the rent the properties were likely to pay. Another was the rate at which these rents should be discounted, somewhat arbitrarily based on 2009 Irish state bond yields.

With hindsight, those guestimates were over-optimistic. NAMA assumed an average mark up of 8.3 percent on the market price of its property, based on hopes that property prices would recover. But since the end of 2009, prices have fallen 23.6 percent on average, with commercial property hit the hardest. And Irish bond yields are still way above their 2009 level.

Spain may err with a similar “misjudgment”. It has a greater volume of impaired assets to sift through than Ireland, and a strong incentive to limit the state capital to be injected into banks.

In theory, Madrid’s more granular data on differing property types should make valuations more accurate. But the most up-to-date pricings could diverge significantly from public statistics, due to the real estate market freeze. Official data indicates that residential property prices have fallen some 26 percent from their peak, but the true drop could be 40 percent, according to one analyst. Spain will be tempted to use the more favourable data.

The same goes for the discount rate. Doing it NAMA-style would mean using Spanish bond yields. Given these are at all-time highs, this will probably be resisted. The obvious danger is a fudge, with low discount rates and too generous a view of how quickly the property market will recover.

That would mean an extra bailout for Spanish banks, with euro zone taxpayers footing the bill. A strong incentive for euro authorities not to let their guard down.





- Economy minister Luis De Guindos told the ABC newspaper Aug. 7 that the Spanish government will pass a royal decree law on Aug. 24 sketching out the workings of its bad bank, where troubled Spanish lenders will put their toxic real estate assets.

- According to Spain’s Memorandum of Understanding, attached to its euro zone banking sector bailout, the bad bank will be fully operational by November 2012.

- NAMA loans report:

- NAMA asset report:

- Spain MoU: - For previous columns by the author, Reuters customers can click on [HAY/]

(Editing by Pierre Briançon and David Evans)


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