The failure of Spanish banks to recognize the extent of their bad loans is preventing them from escaping from their current troubles, according to the economist who set up Ireland's "bad bank" to stabilize the Irish banking sector after the property crash.
Peter Bacon, an independent consultant specializing in Irish property markets, was hired by the Irish finance ministry in early 2009 to identify the scale of the country's banking crisis after its property market collapsed. Mr. Bacon's report led the authorities to establish the National Asset Management Agency, or NAMA, the "bad bank" that was designed to cleanse Irish banks of the commercial-property loans that had become toxic as a result of the market's collapse.
In an interview with The Wall Street Journal, Mr. Bacon said other troubled euro-zone nations such as Spain could draw lessons from Ireland's banking experience because the lenders have been too slow to put a number on their property loan losses.
"If you look at the drift in Spain, there is currently another attempt to stabilize the base of Spanish banks, and there is no confidence that the solution is at hand," he said.
Mr. Bacon said an asset-management agency along the lines of NAMA still offers the best prospect of removing doubts surrounding Spanish banks.Actually, an asset-management agency does not remove doubts surrounding the banks. Ireland purchased assets from the banks twice. Subsequently, it hired BlackRock Solutions in a failed attempt to remove doubt about the banks.
There is only one thing that removes doubts about the banks: requiring the banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.
Without this disclosure, market participants will rightfully think that the government, financial regulators and the banks are hiding something. If they weren't hiding something, then they should provide ultra transparency.
Analysts say Spain is now fighting a similar fight: trying to restore confidence in its banks and to avoid having to accept a bailout....
Mr. Bacon said Spain needs to waste no more time in identifying the losses in its banks....
"What has become apparent is that you cannot muddle through. And I think that is why Spain is back looking at the extent of its property losses," he said.
"Spanish banks are certainly not likely realizing anything like the losses that are in fact sitting on their balance sheets in respect of their property losses. I am saying that from my experience of Irish banks," he said.One of the primary reasons for requiring ultra transparency is that it brings market discipline to the banks and forces them to realize the losses sitting on and off their balance sheets.