Bailout for Bankia

On Monday the delicate financial situation of Bankia, whose balance sheet is burdened with impaired real estate assets with a value of almost 32 billion euros, took a new turn with the resignation of its chairman, Rodrigo Rato, after two years at the head, first, of the caja (public regional savings bank) Caja Madrid, and then of Bankia, which was formed by privatizing and merging Caja Madrid and six other smaller cajas. His resignation followed upon the government’s admission that it was planning to inject public money into Bankia.

There is no longer any doubt that the Popular Party (PP) government’s financial reform, chiefly a demand for greater provisions on real estate assets, has not produced the desired effect. It has only prolonged the agony of Spanish banks amid the growing distrust of international investors, masking for a while the unsound situation of several banks, the worst of these being Bankia. After months gripped by doubts, Prime Minister Mariano Rajoy and Economy Minister Luis de Guindos have at last moved to resolve the problem.

Rato’s resignation makes sense, now. A former economy minister under the Popular Party government of José María Aznar, Rato is an economist but also essentially a skilled politician. He was the right man to steer the conversion of a savings bank into a commercial bank prior to its listing on the stock market. Rajoy seems now to have realized that there is no solution to the crisis in Spain without a clean-up of Bankia, which has for some time be a focus of mistrust of the investment markets.

Rajoy without doubt has intervened to help bring about a change in management, while Rato himself has eased the transition by proposing that José Ignacio Goirigolzarri should succeed him as something that is in the “best interests” of the bank.” And, indeed, for the whole of the Spanish financial system.

Bankia now has to struggle for survival. When the government has to inject billions, it is seemlier that the bank’s chairman is not a man who sat in Aznar’s Cabinet alongside Rajoy. Rato’s departure is also in line with the state’s right to change a leadership team when it puts up public money. A public bailout would not make sense if the government did not take a hand in the decisions of the group it is supplying money to, either as a loan or even more so as capital.

The sudden change at the helm of Bankia offers a clue as to the measures the government plans to take next Friday. If it plans to change the board, there is little doubt that it will employ public money in restructuring the bank. The details of the new banking reform are not yet known, and are indispensable to any informed judgment. It is not the same to inject public money in the capital of Bankia (or in other banks, such as the Galician cajas), as to do so in a real-estate company that would take over the group’s toxic assets. It is not the same to grant a loan at interest, as to become a shareholder of the bank. It is not the same to use a slice of the Spanish state budget, as to resort to EU or IMF funds.

In any case, admitting that public money is the only way to cure Bankia (and with it, the Spanish financial system), the taxpayers have a right to obtain in return strict government control over the banking institutions thus bailed out.