The Spanish government today approved a set of financial reforms that it hopes will end the country's banking crisis. The proposed reforms will fulfill a commitment by Spain to the European Central Bank in exchange for a bank bailout commitment of $125 billion made last month.
The reform package is one cog in the intricate machinery of a eurozone economic recovery plan. The Spanish plan includes a proposal to establish an asset management company, or "bad bank" to assume the defaulted loans and foreclosed properties now held by the country's commercial banks. According a Spanish spokeswoman cited at MarketWatch:
We must heal the financial sector to have banks again lending. The fundamental objective of this reform is have credit flowing back to the economy.
For its part, the European Central Bank now must decide whether to begin buying sovereign bonds in an effort to provide liquidity to Spanish and other national banks. Germany's Bundesbank has rejected bond-buying as a solution to the eurozone's crisis, with the bank's chief even considering resigning in protest. German chancellor Angela Merkel appears to have moved in the direction of allowing the bond purchases, but a ruling from the country's constitutional court likely will be the determining factor on Germany's participation. The ruling is due September 12.
Yields on Spanish two-year notes are down about 0.4% today at 3.694%, their lowest level since early May.
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