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Spain’s bad debts decrease

February 21st, 2013

Earlier this week, The Wall Street Journal reported that the the bad debts held by the central bank of Spain dropped sharply in December from November. This news proposes optimism towards what is referred to as Europe’s debt crisis. According to The New York Times, many Europeans assumed they would be facing “a couple of bad years” when the economic crisis erupted in 2008. Since then, the crisis has continued to, “use up unemployment benefits” and “dash dreams of an easy retirement.”

This crisis has hit the countries Greece, Spain, Portugal and Ireland the hardest according to The New York Times. Evidence of the hardship includes a struggle to bring down debts, raised taxes, workers being laid off, reduced services and charges on medical care that has been free for decades. These have all been problems encountered by Spain, as they “reel back from a decade-long housing boom,” according to The WSJ.

The New York Times reported that, bank bailouts and the economic downturn in Spain increased the country’s deficit and debt levels, and led to a substantial downgrading of its credit rating. They have been a prime concern in the eurozone, as their economy is larger than Greece, Portugal and Ireland combined. News that the bad debts held by the country’s central bank, Bankia, have decreased brings reassurance and hope that Spain is on its way to recovery. Bankia was formed in 2010 in the midst of the on going crisis, by merging seven Spainish financial institutions that held significant influence in the country.

The WSJ reports that the positive news of decreasing bad debts is the result of the transfer of lower-quality credit portfolios from Bankia to what is known as SAREB.  SAREB abbreviates for the English translation “Society for the Management of Assets Proceeding from the Reconstruction of the Banking System.” This “bad bank” was established in November of 2012, as a condition set by the European Union in exchange for €39 billion worth of aid for the country’s troubled banking sector. The goal of the “bad bank” is to operate for as long as 15 years and yield as much as 15 percent a year, according to bloomberg.com.

The WSJ reports that “nonperforming loans for Spain’s bank fell by €24.1 billion to €167.4 billion, or 10.4 percent of total outstanding loans, in December.”  That compares with the highest bad-loan ratio ever recorded of 11.4 percent in November. The Spanish central bank also said in a statement that total loans shrank to €1.604 trillion from €1.683 trillion. According to the WSJ, this was largely the result of “loan reclassifications” after the “lower-quality loans were passed on to SAREB.” Going forward, the Spanish banks are expected to transfer around €60 billion worth of impaired assets to the bad bank SAREB, as the nation continues to push for forward progress on their journey to economic stability.

Information from Bloomberg, The New York Times and The Wall Street Journal were used in this report.