How Rajoy let old PP comrade Rato be his fall guy at Bankia

It would be hard to view the crisis of the fourth-largest lender in the country as a purely political affair. Yet that is exactly what it was.

The origin of Bankia's troubles lies in real estate and finance, but all the major decisions of the last three years have been made in political offices. And Mariano Rajoy, prime minister since November 20, was there for most of them, as were members of the then-ruling Socialist Party and Bank of Spain representatives. It was Rajoy who appointed Rodrigo Rato, a Popular Party (PP) heavyweight and former head of the International Monetary Fund, to lead Caja Madrid; it was also him who sanctioned the great merger of seven regional savings banks under PP control that became known as Bankia. And it was Rajoy who let Rato fall.

All the government and PP sources consulted by this newspaper agree that the climax and the ending of this particular story are 100-percent political in nature. As a matter of fact, even Rato's eleventh-hour decision to backtrack on the proposed merger with CaixaBank can be explained as a power struggle pure and simple.

A few PP sources said that Rato did not wish to share power over Bankia - banking conglomerate with 10 million clients, thousands of shareholders and majority stakes in key companies like Iberia - with Isidre Fainé, the Catalan chairman of La Caixa and Caixabank. The former's hyper-competitive style would seem to support this theory. But Rato himself told a different story to the people in his circle of trust. It was not a personal matter, he said, but rather that he could not allow what would essentially be Spain's main bank to be in the hands of Catalan nationalists.

Austerity is all very well, but what are you going to do with Bankia?"

La Caixa is controlled by the Catalan government, currently held by CiU. Rato is a founding member of the PP, a conservative party that favors Spanish unity and has often been at odds with Basque and Catalan nationalists. And Bankia was, essentially, a PP bank. Rato (who was economy minister in the governments of José María Aznar, and Rajoy's rival in the party race for succession) was allegedly offered a share of the power, and the opportunity to be the merged bank's chief when Fainé turned 70. But Rato told aides that an internal CaixaBank protocol established that power would always remain in Barcelona.

It was therefore politics that delayed a decision that was on the prime minister's table for at least two months. Rajoy, as usual, waited until the move seemed wholly inevitable. Economy Minister Luis de Guindos, on the other hand, had been telling him at least since March that it was the only thing to do. He, like all the other officials in charge of selling Spain to outside investors, kept running up against a recurring problem. They made their presentations to the investors, underscoring the reforms, the cutbacks and business opportunities, only for investors to reply: "That's all very well, but what are you going to do with Bankia?"

Rajoy was aware of that pressure. But Rato kept holding on, refusing to admit that things were as bad as they were. As recently as April 26, at the meeting of the board of BFA, Bankia's parent holding company, Rato delivered a reassuring message to the representatives of the PP, Socialist Party, United Left and trade union UGT gathered there. Some boardmembers remember that Rato was very optimistic, and that there were no critical voices in the room. Only 15 days after that, Bankia would be nationalized and all those boardmembers removed from their posts.

Yet despite the soaring risk premium, the collapse of bank shares in the stock market, the criticism in the international financial press and the impatience among his own government, Rajoy kept holding out. Until two key events took place, that is.

Many feel it is a mistake not having a deputy PM from the economic team

First, the IMF produced a devastating report on Spain. After spending a month in the country, its experts gave Bankia a very bad grade and recommended an injection of public funds to shore up the financial sector. Rajoy had promised that he would not pump public money into the banks, and that was another reason why he resisted making a move. It would essentially constitute yet another broken promise - a common theme of his first months in office.

The other key event - although government members consider it less relevant - is Rajoy's meeting with Mario Draghi in Barcelona on Thursday, May 3. The European Central Bank governor felt that the Spanish financial reform of February was insufficient, and he wanted more. Something was needed to restore international confidence in Spain, and Bankia was (and is) at the heart of all the trouble.

A day later, on Friday, Rato's resignation began to take shape. The details were ironed out over the weekend, and the announcement made on Monday.

Rajoy's decision to let Rato fall came at a high internal cost. It was he who imposed his man Rato to lead Caja Madrid in 2009 in a tense meeting with Madrid premier Esperanza Aguirre, who wanted to appoint her right-hand man Ignacio González. By removing him, Rajoy is admitting that it was a mistake to appoint him in the first place.

But there's more. Rato is not just a well-liked man within the PP - he is also the face of the party's good economic governance under Aznar. Rajoy used this image to campaign for office in 2011. Rato's fall brings down part of the PP's economic good name with it.

Also, many members of government are concerned about the way in which the resignation was handled - a conspicuous silence from the government at first, then the rumors, then a stock market in freefall and a risk premium in orbit. To many, it underscored what they view as the mistake of not having a deputy prime minister in charge of economic affairs within the executive.

The debate over the "selling" of economic policy remains open. All the tough decisions first suggested by De Guindos, including the creation of a bad bank and pharmaceutical co-payment, have a way of becoming a reality, which proves that he carries great weight within the party. But he is not deputy prime minister, and that means that his statements are often questioned in public by other PP members.

The government has three main economic figures: De Guindos, Finance Minister Cristóbal Montoro and Álvaro Nadal, head of the economic office. Add to that the Bank of Spain and Rato himself, and this crisis becomes very difficult to handle. And Rajoy's style of doing things, working in the shadows and refusing to provide explanations, makes everything more complicated.

Rajoy has already taken the most difficult step by removing Rato and nationalizing Bankia. He has proven he is ready for anything, said several members of the executive. And they trust that this message will reach the markets. If not, then the next move is already on the table: stepping in to rescue an entire regional government as a show of strength. Rajoy, again, will hold out as long as he can. But if he thinks it is inevitable in order to appease the markets, then he will do it.