Beginning of a solution

Economy Minister Luis de Guindos proposed in Congress on Wednesday a rescue plan for Bankia that is based on two fundamental instruments. The first and most important is the execution of two capital increases, the first for Banco Financiero y de Ahorros (BFA), Bankia’s parent company, and the second for Bankia itself, using public and private funding to clean up and guarantee the solvency of the banks.

The first capital increase will leave BFA clearly in control of the state in order to gear it up for the second capital hike, which will be that of Bankia, in which private sector shareholders will be invited to take part through subscription rights. The government has chosen to inject public money in order to dispel any doubts about its intention to strengthen the balance sheets of the banks with all the public resources required.

The second instrument focuses on management: the makeover of BFA and Bankia’s boards of directors. According to the plan explained by De Guindos, the new management teams will have to present a viability plan in which the banks’ capital needs are identified. This plan should be presented promptly in order to make known once and for all what the final cost of the rescue will be.

But in the scheme proposed by De Guindos there is a fundamental political aspect missing. There needs to be a parliamentary investigation into the reasons for the crisis at Bankia and those responsible for it, whether these be reckless intervention on the part of the Madrid regional government, mistaken financial decisions taken by the central government, or dubious professional management.

The core issue is the cost of Bankia’s capital increase. According to the government’s plan, Bankia’s capital requirements should be covered by the parent company BFA (which will be majority-owned by the state, probably as much as 90 percent) up to 45 percent, with the remaining 55 percent in the hands of private investors through subscription rights. It is likely that some of the private investors will not exercise these rights, placing the onus on BFA to make up the balance. In order to prevent doubts and suspicions building up about the Spanish banking system, it is important that the renewal of the management teams and capital needs of BFA and Bankia are specified as soon as possible.

In the absence of more details, De Guindos at least clarified that BFA will be cleaned up by means of a direct injection of public funding. This was not the initial approach of the government, which, in the face of crude reality, has had to backtrack and abandon the idea of using convertible bonds. This, however, is the cleanest and most transparent solution possible, which, at the same time, will constitute a more efficient approach to cleaning up the balance sheets of BFA and Bankia. It is also one of the few solutions — perhaps the only one — that merits credibility among the markets.

But it should not be forgotten that this solution will also turn out to be expensive, at over 12 billion euros. And this leads to a political consideration. Perhaps the Spanish government could end up being obliged to tap the European Stability Mechanism. There would be no stigma attached to doing so.