Concerns for Spanish banks as PM’s call for market calm ignored

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By a Newsnet reporter

Despite the record government bailout of the embattled Spanish bank Bankia, and appeals by the Spanish Prime Minister for calm in the markets, the bank has continued to plummet in value on the markets, raising fears that contagion from the Greek insolvency crisis may not be easily contained. 

The Madrid stock exchange fell by 2.17% on Monday and closed at its lowest level since 2003.  The banks in particular suffered badly, with Bankia shares losing 13.38% of their value.

Bankia is now effectively state-owned.  Bankia was a major funder of the massive property boom in the country over the past 15 years, and is now left with thousands of unsold properties on its books which were collateral for loans given by the bank.  The bank is struggling with debts with a total estimated value of €32 billion.  

The consequence of the recapitalisation plan for Bankia, which will cost the Spanish government an estimated €23 billion, has been to create uncertainty in the markets.  Investors question the ability of the Spanish government to raise the money out of public funds and speculation has increased that Madrid will have to ask Europe for assistance.  The Spanish newspaper El Mundo reported on Monday that Madrid will have to ask for €30 billion of European funds in order to help shore up three other struggling banks, CatalunyaCaixa, Novacaixa Galicia and Banco de Valencia.

The Spanish government is attempting to calm the markets, but with little effect.  Speaking at a press conference in Madrid on Monday, Prime Minister Mariano Rajoy said:  “There will not have to be any international bailout of the Spanish banking system.”

However the markets were not convinced, and continued to fall.  Mr Rajoy has avoided the media since assuming the post of Prime Minister last December and rarely appears at press conferences.  The invisibility of the Prime Minister over the past few months has provoked rumours in Spain that Mr Rajoy, faced with the scale of the Spanish banking crisis, has suffered a personal crisis of his own.   

Mr Rajoy admitted that it will be very difficult for the Spanish government to obtain the necessary funding, although he claimed his government’s bailout of Bankia had influenced the so-called risk premium, the difference between Spanish and German bond yields.  The higher bond yields rise, the more expensive it is likely to be for governments to borrow money.  The Spanish government is currently forced to pay interest rates on bonds which many market analysts consider unsustainable.  

“There are major doubts over the eurozone and that makes the risk premium for some countries very high.  That’s why it would be a very good idea to deliver a clear message there’s no going back for the euro,” Mr Rajoy said.

However far from calming the markets, Mr Rajoy’s words “contributed to the acceleration of the falls in the value of the banks, since he did not clear up the doubts about the sources of the funds which are going to be injected into Bankia, and perhaps in other banks which are going to need new help,” said Daniel Pingarrón, business analyst of the firm IG Markets.

The funds to bail out Bankia are supposedly coming from the Fondo de Reestructuración Ordenada Bancaria (FROB), public funding for the restructuring of the Spanish banking system.  However the FROB has only some €5 billion available, whereas Bankia will require an immediate bailout of around €19 billion, and a total of €23.5 billion.

Speaking to the French news agency AFP, a spokesperson for the Spanish government said that Madrid was studying two options.  The first, which the Spanish government would prefer, consists in raising the capital from the market.  The second option would be to recapitalise Bankia with government bonds in return for shares in the bank.  The goverment could also use this method to prop up other troubled lenders – a move which would push the country’s debts above 79.8% of economic output.

“This method has been used by Germany and by Ireland in the past, it is perfectly valid,” a Spanish government spokesperson said.

This method would be an indirect European bailout of the Spanish banks, avoiding the need to go to the market and bearing the very high interest rates currently charged to Spain.

Mr Rajoy categorically stated that the rescue of Bankia “would not influence the public deficit at all”.  Nonetheless, he did not wish to define the impact of the rescue plan on the public debt saying that the decision on which way to proceed had yet to be taken.  

If the bailouts required by the other three banks are confirmed, the Spanish state will be faced with finding €50 billion in order to rescue its ailing banking sector.  If the tensions in the markets continue, the country could find itself being forced to ask the IMF or Europe for the funds necessary to prevent a collapse of its banking system.