Compulsory overhaul of the financial sector

The European Commission has imposed a set of draconian conditions on the Spanish banks that have been nationalized (Bankia, NCG Banco, Catalunya Banc and Banco de Valencia). In exchange for a bailout of 37 billion euros, Brussels is demanding that they reduce their volume of assets by 60 percent; sell off 45 billion euros’ worth of assets to the so-called bad bank, at discounts ranging from 50 to 63 percent; impose sharp haircuts on holders of preferred shares and bank bonds; and undertake a harsh process of restructuring, involving the loss of 8,000 jobs, and the closure of more than a thousand branch offices. Brussels is limiting the now-nationalized cajas (publicly administered regional savings banks) to local banking activities, and is prohibiting their participation in risky real estate development.

This, in general terms, is probably the overall restructuring that has long been talked of, but never carried out, and which the Spanish political and financial authorities ought to have designed in 2009, and implemented at the very latest starting in 2010. The severity of the impositions — for all the optimism shown by the EU competition commissioner, Joaquin Almunia — does not guarantee that the Spanish banks and cajas will be in a position to supply credit during the next two years; but it is the only viable and suitably forceful procedure to re-establish financial normality in the country.

Third time lucky

The restructuring arrives tardily, after unnecessary delay, and its effects will also depend on how the second part of the Brussels-orchestrated financial reform works out — the part that affects financial institutions that are in need of recapitalization, but are not calling for public aid. It is obvious that Brussels would have liked to impose similar conditions on some of these banks; but the brunt of the restructuring falls upon the cajas.

After two failed domestic reforms, this third Brussels-driven process has to be a success because the Spanish economy cannot survive with a considerable part of its banking system chronically bed-ridden with the flu. It is indispensable that the affected financial institutions cooperate smoothly with the Bank of Spain and the Orderly Bank Restructuring Fund (FROB), as Bankia has already announced it will do, if the operation is not be a failure.