The new chairman of Bankia, José Ignacio Goirigolzarri, on Wednesday proposed the state convert the 4.465 billion euros lent to the bank in 2010 by the Orderly Bank Restructuring Fund (FROB) into shares in its parent company Banco Financiero y de Ahorros (BFA). This conversion will give the state a 100-percent stake in BFA, and automatically 45 percent of Bankia, as well as full responsibility for its management. The nationalization of Bankia, because this is what we are talking about, should logically be of a temporary nature. The aim is not to create a state-owned bank but to address the worrying deterioration in the group’s capital as made manifest by its auditors. After cleaning up and consolidating its balance sheet under strict public vigilance, the bank should revert to private management by whatever means deemed most appropriate.
In strict financial terms, the operation is probably the only one that makes sense at the moment. Bankia urgently needs capital, which rules out any help in the form of loans. It also needed with some degree of urgency a change in its management board because the previous team had run out of credit after the merger operation and Bankia’s listing in the stock market, which are some of the reasons behind its current complicated situation. But not the only ones. There have also been serious political errors on the part of the government and the Bank of Spain, which went round in circles with mergers and growing provisions that have failed to relieve the stranglehold on lending and the deterioration in capital caused by toxic real estate assets.
The conditions required for the state’s entry to be acceptable consist in explaining clearly to the public the temporary nature of this, that it is guaranteed the bank is managed by a board of directors in public hands, and that when the new managers have cleaned up its balance sheet the state will have the chance to make capital gains from the operation, or in the worst of cases, minimize its losses. The temporary nationalization of Bankia is a process not very different from that applied to other Spanish financial groups. The fundamental difference is the size of the bank. Bankia is a systemic element whose bankruptcy would pull down with it a large part of the financial market and cause serious harm to Spain’s economy. Its size is also an obstacle in the way of a quick sale or its auctioning off.
In theory, the state’s decision to take over the reins at Bankia should dispel the doubts surrounding the Spanish banking sector; doubts that pushed Spain’s risk premium to 454 basis points on Wednesday. But despite the decisive political move on Bankia, the abiding impression of investors is that the government lacks a clear plan for cleaning up the balance sheets of the banks and for restoring confidence and credit flows. The supervisors’ decision to allow Bankia’s shares to continue to trade on Monday, despite the fact that its accounts lacked the stamp of its auditors, was hardly a boost to confidence.
It is vital to understand that the delicate situation of Spain’s banks is not only due to devalued real estate assets. The prolonged recession and an increase in unemployment have caused non-performing loans to shoot up. Assets now considered to be healthy could deteriorate if the recession extends much beyond two quarters. It is essential to avoid this risk by increasing bank provisions for real estate assets that are currently considered sound.