Bankia is at the heart of concerns about the fragility of the Spanish banking sector right now, as the Spanish government contemplates a way to provide the bank with a €19 billion ($24 billion) bailout.The third-largest Spanish bank—formed after a merger of seven troubled cajas in late 2010—it also holds €40.83 billion in toxic real estate assets. That’s the highest quantity of domestic real estate assets of any Spanish bank, investments which have been failing in the wake of a housing bubble.
Just a few weeks ago, the Spanish government essentially nationalized the troubled lender. The Spanish bank bailout fund (the Fondo de Reestructuracion Ordenada) converted its €4.5 billion in holdings in Bankia’s parent Banco Financiero de Ahorros into a 45 per cent controlling stake in the company. It also shook up Bankia’s board, unseating former chairman Rodrigo Rato with BBVA-alum Jose Ignacio Goirigolzarri. It also agreed to inject some €19 billion into the troubled lender to keep it afloat.
The biggest news today is about how the Spanish government will do that—and what that bailout method will mean for Spain. Two reports are circulating right now, neither of which include a bailout from international lenders.
First, Spain has been considering giving Bankia funding in the Spanish government bonds, which it would use as collateral against a loan from the European Central Bank. While analysts have doubted the likelihood of this plan, a source close to Spanish PM Mariano Rajoy and consulted by Reuters Espana said, “The ECB has been consulted about this extensively. This solution has already been utilized before by Germany and Ireland and is perfectly valid…I understand that [the ECB] doesn’t have any problem [with it].”
The other possibility would be issuing government debt in the markets to fund the bailout, according to a Reuters source. While this is technically a viable option, Spain’s willingness to place an even bigger burden on government debt is troubling because the country is already paying a steep 5.4 per cent on three-year borrowing and 6.4 per cent on 10-year borrowing. This would also spread losses out over the wider Spanish populace, something that the government has been loathe to do.
While more and more investors are clamoring for international aid for the Spanish banking sector, it is unclear that this short-term boost would be a long-term positive for Spain. Not only would this underscore the fragility of the Spanish government and likely lead to more speculative bets against it in the markets, it would make the country reliant on institutions which have so far fallen short of providing adequate crisis solutions.
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