Spain acted in “worst possible way” on Bankia bailout, ECB’s Draghi says

European Central Bank (ECB) President Mario Draghi said Thursday that the Spanish government had acted in the “worst possible way” in underestimating the extent of nationalized Bankia’s capital needs, as was also the case with Belgium when Dexia crashed.

In response to a question from a lawmaker in the European Parliament on whether the recapitalization of Bankia had been botched from the start, Draghi replied: “What Dexia shows — and Bankia shows as well — is that whenever we are confronted with the dramatic need to recapitalize, if you look back, the reaction of the national supervisors [...] is to underestimate the problem, then come out with a first assessment, a second, a third, fourth...

“That is the worst possible way of doing things, because everybody ends up doing the right thing but at the highest possible cost and price,” Draghi said.

Bankia’s new management team has identified the bank’s recapitalization needs at 23.4 billion euros, including the conversion of a 4.4-billion-euro loan already granted by the state into common shares. Economy Minister Luis de Guindos had previously estimated the needs of Bankia and its parent Banco Financiero y de Ahorro’s (BFA) at only 12 billion euros.

Can the ECB fill the vacuum of  governments on fiscal growth? The answer is no”

Earlier this week, BFA restated its financial results for last year to show the largest ever loss by a Spanish bank.

Draghi was speaking in the European Parliament in his capacity as head of the European Systemic Risk Board, a panel that monitors financial stability.

In response to less-than-veiled intimations by Prime Minister Mariano Rajoy that the ECB should step in to ease the pressure on Spanish government debt, Draghi said the bank could not fill the “vacuum” left by the government’s inability to come to grips with the problems facing them.

Spain’s risk premium hit a euro-era high of 540 basis points on Wednesday. It fell three basis points to 536 on Thursday.

What cannot be the case is to maintain this uncertainty”

“Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no,” Draghi said. “Can the ECB fill the vacuum of the lack of action by national governments on the structural problem? The answer is no.”

Echoing comments by the European Commission on Wednesday, Draghi embraced the idea of the euro zone moving toward a banking union with centralized control, and urged European leaders to forge a political vision to bring this about.

“What is the vision?” he said. “What is the euro going to look like a certain number of years from now? The sooner the answer is specified the better it is.”

Draghi was speaking as the European Commission called on the Rajoy government to present its plans for the recapitalization of Bankia.

The government had suggested that Bankia’s bailout could be funded by a direction injection of government debt, but has backtracked on that idea in the face of opposition from the ECB.

“What cannot be the case is to maintain this uncertainty,” the spokesman for the EU commission for economic and monetary affairs, Amadeu Altafaj, told Spanish state radio RNE.

“What nobody can expect is that in the light of these negative earnings by some banks that the markets will react with euphoria,” Altafaj said. “Therefore, the sooner doubts are dispelled, the better.”

Altafaj said it was up to Spain to decide how to fund Bankia’s bailout, but reminded the government there are European rescue funds available to do so, although this had “negative connotations.”

Echoing his boss, Olli Rehn at the economic affairs commission, Altafaj said current regulations governing the European Stability Mechanism do not allow for a direct recapitalization of European banks without prior petition from their national governments.

“If we move closer to a banking union, this type of mechanism could be foreseen, but as of now in the Spanish case this is not relevant,” he said.

Asked if the Rajoy government was doing its homework on reforming the financial sector, the EC spokesman said the government had got the ball rolling, although there have been a “lot of suspicions” about certain banks.

“It was suspected some time ago that the situation at some banks was precarious, but it is good to know the exact diagnosis of these weaknesses and then to undertake the necessary reforms,” he said.