As anticipated in the initial bailout deal Spain negotiated with its EU partners this summer, Madrid will create an asset management company to help clean up its troubled banking sector, Finance Minister Luis de Guindos said. In December, the company -- a so-called bad bank -- will start buying real estate assets at below-book-value prices from the country's weakest banks, which have been struggling to absorb real estate loans that have soured as the property market has collapsed. Up to €100 billion in EU loans will fund the cleanup.
The package grants Spain's central bank more power to intervene in troubled banks and implements some measures to make bank deposits more enticing. It also includes stricter rules for the sale of complex financial products, which banks sold nationwide to unsophisticated retail investors. The latest plan "culminates the restructuring of the financial sector, which is one of the fundamental elements to put an end to Spain's crisis", said Deputy Prime Minister Soraya Saenz de Santamaria.
The Spanish package also sets the stage for an important European Central Bank board meeting on Thursday. Madrid has been adamant that the ECB should buy Spanish government bonds en masse to help lower its borrowing costs. Foreign investors have fled Spanish debt this year amid concerns that a deepening economic contraction, combined with the need to rescue local banks, will hinder the country's ability to pay its debts. That, in turn, has fed fears that Spain will require a wider rescue.
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