Wednesday 30 May 2012

The Bankia bailout

On Friday 25th 2012 Spain's largest banking group Bankia went cap in hand to the Spanish government in order to ask for a €19bn state intervention, in order to prevent them from going bankrupt. The banking group already received a €4.5bn "investment" in 2010 meaning that the Spanish taxpayer is going to foot the bill for a €23.5bn "investment" in return for something like a 90% stake in the debt riddled banking group.

The markets obviously took the news badly, Bankia shares plummeted 13.38% before trading in the company was suspended, the rest of the Spainsh banking sector took a hit, The blue-chip Ibex 35 has been in free fall and the yields on Spanish government bonds began rising towards the 7% mark that is widely regarded as unsustainable.

The president of the Bankia group José Ignacio Goirigolzarri further panicked the markets by saying that "We don’t need to talk about giving any of it back" but changed his tune over the weekend to imply that he meant the unprecedented bailout could be used as a "state investment" and that it would be up to the Spanish government when to sell its stake in Bankia to obtain the highest possible price to benefit taxpayers.

This narrative about bailouts being "investments to benefit the Spanish taxpayer" will sound remarkably familiar to residents of the UK who were told in 2007-08 that the £850bn package of bailouts and emergency nationalisations of debt riddled financial institutions like Northern Rock, Bradford and Bigley, Lloyds and RBS should be considered as lucrative government investments instead of a wanton act of using taxpayers' money to prevent the bankruptcy of unviable debt laden businesses.

Northern Rock was split up into a "good bank" and a "bad bank" with the government keeping the bad bit and selling the "good" bit to Virgin Money at a loss of £2bn. A similar trick was played with Bradford and Bingley, with the government keeping the debts and flogging off the "good bank" on the cheap to Spanish banking group Santander, who rebranded it (as well as the other former building societies it had acquired) under the Santander name. By far the biggest intervention was the RBS nationalisation, which cost £45.5bn for an 83% stake. As of 2012 the British taxpayer is looking at a £22bn (48%) loss on RBS alone.

Common sense alone should be enough to tell the Spanish taxpayer that this is going to be absolutely nothing like an "investments to benefit the Spanish taxpayer". If it is such a lucrative investment opportunity, where is the enormous queue of private sector investors lining up to grab their share of this wonderful investment opportunity?

On the Monday the Spanish Prime Minister Mariano Rajoy continued the charade at a news conference by insisting that the intervention was not a "bailout" but an "investment" and that  there would be no "bailout" for the wider Spanish banking sector either. The right-wing Popular Party leader said he was confident the €23.5 billion being injected into BFA-Bankia would be recovered. "Once the bank has been cleaned up, as the leading financial institution in Spain, it will be sold and the state will get back its investment".

Given the massive losses on UK bailouts/investments in debt riddled banks, Rajoy must either be delusional or utterly disingenuous to claim that the Spanish taxpayer will somehow spin a profit out of the creation of a zombie bank, that should have been allowed to die from its terminal debts.

Rajoy and the Popular Party have stated that the method of providing the "investment" has yet to be decided after several commentators began reporting that the only way that the debt laden Spanish government would be able to provide funds for the insolvent bank is through swapping Spanish government bonds in return for at least a 90% stake in the company, which would then redeem the bonds at the European Central Bank to create liquidity. The reason this is supposed to work is that the ECB still treat government bonds as if they are high quality collateral, rather than the extremely risky assets as the markets do. The Financial Times then ran a piece claiming that the ECB had flatly rejected the idea of indirectly bailing out Bankia via bond transfers only for the ECB to retort with the statement that "contrary to media reports published today, the European Central Bank has not been consulted and has not expressed a position on plans by the Spanish authorities to recapitalise a major Spanish bank, the ECB stands ready to give advice on the development of such plans."

There has been a wave of public indignation after it was revealed that the departing financial director of one of a Bankia subsidiary company Aurelio Izaquierdo had accrued a huge €14m pension fund. This too is reminiscent of the UK banking crisis where executives at debt stricken banks walked away with vast pension funds and golden goodbyes. The most notorious example being Fred Goodwin who was rewarded for his work in leading RBS to a £24.1bn loss with a pension fund worth £700,000 a year and a 2.6m bonus for the year in which the bank posted the biggest loss in UK corporate history.

The Prime Minister has steadfastly refused to hold an official inquiry into the Bankia crisis, presumably out of loyalty to former chief executive Rodrigo Rato, who served as the Spanish finance minister for Rajoy's Popular Party between 1996 and 2004 and also served as the head of the IMF between 2004-07.

An abandoned construction project in Ibiza, still displaying the ludicrous
182,500€ asking price. There are an estimated 700,000 such properties in Spain.
One question that should be under serious consideration is, how on Earth Bankia posted 2011 profits of €302m in February 2012 under the leadership Rodrigo Rato, only to revise them downwards to a loss of €2,979m a few months later after he had stepped down?

Perhaps some of the executives at Bankia are relaxed about waiving their pension funds and severance pay because they have already had their payoff through the sale of massively overvalued shares thanks to the creative accounting that allowed them to overestimate their performance in 2011 by well over €3bn. The excuse for this absurd "miscalculation" is that the bank are sitting on a vast amount of "toxic" property assets, however the Spanish property crisis happened back in 2008. The Spanish banks have had four years to establish their exposure to toxic property assets, they would have to take people for cretins if they expect anyone to believe that they only just found out the enormous scale of  recklessly speculative property investments on their books.

This latest financial crisis is making one thing very clear, that Mariano Rajoy and his right-wing Popular Party are much more determined to protect Spanish corporate interests than they are to protect the interests of ordinary Spanish people. It was only a couple of months ago that the Spanish industry minister Manuel Soria spoke out against Argentina's oil renationalisation plans, saying that  "If there are hostile moves towards [Spanish corporate interests] anywhere in the world, this government will interpret them as hostile moves against Spain" only a couple of weeks after vast public protests across Spain against the draconian new pro-corporate anti-worker labour reforms that PP have introduced. This Bankia intervention is going to cost an additional €19bn, either from their bond swapping plan or raised directly from the markets, which represents a huge proportion of the €27bn in austerity measures inflicted on ordinary working Spaniards in the 2012 budget with the justification that Spain can no longer afford luxuries like pay rises, welfare and infrastructure investment or labour rights.

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