Bankia’s failure to face reality brings back crisis

Posted on May 7, 2012

Rodrigo Rato, Bankia

In July last year, Bankia held a ceremony in the marble-lined central dome of the Madrid stock exchange to celebrate the first trading day of its newly-listed shares.

As Rodrigo Rato, the former International Monetary Fund managing director and Bankia executive chairman, stepped up to the podium to deliver a celebratory speech, a large screen beamed the bank’s share price in its first moments of trading.

    In front of the assembled crowd of Spanish financiers and media, the shares began to fall sharply. The screen was quickly turned off.

    It is this tendency to ignore uncomfortable realities that has thrust Bankia – billed at its listing as the definitive act in Spain’s bank restructuring – back into the forefront of the country’s financial crisis.

    Less than a year after €3.3bn shares in Bankia were sold to Spanish institutions, and retail investors, Madrid is poised to inject €10bn into the bank as early as this Friday at a time when it is battling to reduce its budget deficit, and Mr Rato has resigned.

    Long nicknamed the “elephant in the room” of Spain’s real estate-troubled lenders, the once miracle solution of Bankia is now seen by experts as having been a botched effort that could now cost Spanish taxpayers much more than the initial €4.5bn it received in state aid soon after it was created two years ago.

    “Bankia is a problem for Spain,” says Robert Tornabell, a finance professor at the ESADE Business School. “We must learn that toxic assets need to be cleaned up, not just merged into a bigger problem.”

    After months of insisting that not another euro of public money would be spent on rescuing banks, Mariano Rajoy’s Popular Party has now been forced to relent, losing credibility while throwing out one of its favourite sons, the former PP economy minister Mr Rato.

    Formed from the merger of seven private savings banks, or cajas, that had lent widely during the inflation of Spain’s property bubble, Bankia was intended by Spain’s previous government to create a strong new entity that could absorb losses, and begin lending again into a credit starved economy.

    Instead, Bankia has struggled to cope with the mess that the parent group inherited from some of its composite banks. One subsidiary, Banco de Valencia, was forcibly taken over by the Bank of Spain to avoid collapse in November – triggering a civil war inside Bankia over whether some of the partners overvalued their assets at the time of the merger.

    Some observers – while noting that the plight of Bankia is not representative of Spain’s larger, more globally-exposed banks – worry that it reflects a collective refusal to acknowledge the true extent of the country’s real estate problem, in spite of the government forcing lenders to provision an additional €54bn against bad loans this year.

    As bad loans have increased, reaching the highest level in 18 years as a percentage of total lending, Spanish banks have been forced to rush to offload real estate assets from their balance sheets, hindering their ability to lend to the real economy.

    “The legacy assets of real estate, property and land in Spain span many of the banks, is sizeable and represent a heavy millstone that must be lifted before the banking sector can be restored to its proper functions and health” says Justin Jenk, a partner at European Resolution Capital Partners, an expert in bank restructuring schemes. “Banks need to provide credit, not act as real estate agents”.

    While other countries such as Ireland have adopted sector-wide “bad bank schemes” to centrally manage the legacy assets, Spain has so far adopted a piecemeal approach. That Bankia seems likely to need a second rescue appears to show it has failed.

    Economists now fear that unless swift and decisive action is taken to force lenders to fully mark down their bad loans, and present them in a way where they can be cleaned up, then the country’s second recession in three years will be long and deep.

    “The Spanish authorities need to appreciate the true extent of the crisis,” says Mr Jenk. “A handful of banks will be strong enough to weather the storm – many others not.”

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