Copyright ©2012 NPR. For personal, noncommercial use only. See Terms of Use. For other uses, prior permission required.

MELISSA BLOCK, HOST:

This is ALL THINGS CONSIDERED from NPR News. I'm Melissa Block.

AUDIE CORNISH, HOST:

And I'm Audie Cornish.

Spain is taking some drastic measures to prevent its troubled banks from sabotaging its economy. Last night, Spain nationalized its largest real estate lender. And tomorrow, it plans to announce an overhaul of the entire banking system. These efforts are similar to what Ireland tried to do a couple of years ago, tried and failed.

Lauren Frayer tells us more from Madrid.

LAUREN FRAYER, BYLINE: If Spain is the weakest link in the eurozone now, banks are the weakest link in the Spanish economy. They're also the biggest landlords here after the housing bubble burst and sparked a wave of foreclosures. Banks are drowning in unpaid loans and properties they'd have to sell at a loss. But...

JAVIER DIAZ-GIMENEZ: If you mark them down to market, these losses wipe out your capital and might force you to go bankrupt.

FRAYER: Economist Javier Diaz-Gimenez, at Spain's IESE Business School, says that was the case with Bankia, the country's fourth-largest bank overall, but the biggest in real estate. Spain took a controlling stake in Bankia last night, and others could follow when the government announces reforms tomorrow. They're likely to include creation of a so-called Bad Bank, a government holding company that absorbs toxic assets from other banks. Diaz-Gimenez explains.

DIAZ-GIMENEZ: Remove this stuff from my balance sheet. Just, I don't want this to be my problem. And the way you do it is you have to sell it to somebody at some price. Determining the fair value of these assets is the key thing.

FRAYER: That's where Ireland had trouble in 2009. Like Spain, it had a massive property boom and bust, and the government nationalized banks' assets, which turned out to be worth even less than it thought. So Ireland ended up needing an E.U. bailout, something Spain wants to avoid. It's hiring an outside auditor to value banks' assets.

Fernando Fernandez, an economist at Madrid's IE Business School, says there is one major difference Spain can take heart in.

FERNAND FERNANDEZ: I mean, Ireland actually did nationalize the three largest banks, which were basically 90 percent of the financial system. Here, all in all, we're talking less than 30 percent of the financial system. So there's a major part to the financial system in Spain that is healthy, that is solvent, that is liquid and that has no problem.

FRAYER: Spain is trying to enlarge that healthy part of the banking sector to keep credit flowing to people like Jorge Mellado, a 26-year-old lawyer who wants to buy a house, but can't get a mortgage. Austerity means he's paying higher taxes for fewer benefits. And he's miffed that his tax money is now going to rescue the banks.

JORGE MELLADO: If you put the public money in a bank, you have to put the public money into other companies.

FRAYER: Like his law firm, he says. It can't afford to pay him more than $1300 a month. He lives with his parents.

Spaniards are already sacrificing, and the government will have to sink deeper into debt to finance these banking reforms. The price tag for taxpayers could reach $65 billion, many times what's been cut from health and education.

Economist Diaz-Gimenez says people realize it's a gamble.

DIAZ-GIMENEZ: If Bankia resuscitates, which it might, then the Spanish public will make a little profit. And if Bankia fails, the Spanish taxpayer will be, rightly, very upset.

FRAYER: Americans and presidential candidates may still debate whether the 2008 U.S. bank bailout was right. But Washington's finances were robust enough to insure against possible losses. And that may not be the case here in Spain, with borrowing costs rising and the economy set to shrink this year. The timing isn't perfect. But Spain may not have much more time, if it doesn't do this now.

For NPR News, I'm Lauren Frayer in Madrid.

Copyright © 2012 NPR. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to NPR. This transcript is provided for personal, noncommercial use only, pursuant to our Terms of Use. Any other use requires NPR's prior permission. Visit our permissions page for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR's programming is the audio.

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.