Bankia’s share suspension highlights problems for other Spanish banks the FROB and Spain as a nation

Today has begun with the news that Bankia of Spain has seen its share trading suspended by the Spanish regulator as rumours circulate that she will need yet more support from the Spanish taxpayer. This is a moot point in several ways. Firstly Bankia is a bell-weather for the state of both the Spanish housing and its banking industry. Secondly it is another potential burden for Spain itself at a time when its burdens are rising and causing increasing concern. And thirdly it is an example of Spain’s preferred “rescue” strategy of merging struggling cajas (savings banks) and in fact its creation involved the merger of seven of them.

What do you think Shaun?

Back in my article on May 8th I pointed this out about Bankia’s situation.

So Spain has a problem as everyone with any sense will realise that Bankia needs more that the 7 to 10 billion Euros of extra capital being mooted. even worse it will focus attention on the other Spanish banks which need capital.

This fed into a regular theme where nations bail out banks with as little as they can get away with rather than enough to fix the problem. We saw this happen time and time again in Ireland where every couple of months or so we got reports of a further deterioration. The errors in such a tactic are manifold as both their credibility and their reputation for honesty disappear southwards.

The Official View

Only on Wednesday in response to enquiries that Spain had still not specified how much the bail out of Bankia would cost her Finance Minister  Luis De Guindos told the Financial Times this.

Bankia-BFA was a unique case in the Spanish financial system, because of its high market share, high exposure to real estate, higher than the sector average, and the capital it needed as result of the two [banking] reforms

I am afraid the use of unique makes it sound like Anglo-Irish Bank. There are two main problems with doing such a thing. Firstly every one knows that Anglo collapsed and secondly that other Irish banks collapsed too as it proved to be an extreme case but not a unique one.

Echoes of Royal Bank of Scotland and a problem for bank shareholders

Bankia had a rights issue last summer as shareholders backed her with more finance. If we recall RBS having a large rights issue for shareholders (£12 billion if I recall correctly) and then collapsing only a few short months later I think you can see where I am heading. Indeed the conversion of state loans to equity raising Spain’s stake to 45% has of course reduced the position of shareholders which will get yet weaker as more money is required. They have already lost around 55% of the money put in at the time of the rights issue.

Never Mind there is going to be an independent audit

Oliver Wyman and Roland Berger are going to lead an audit of the Spanish financial system. Let me give you an example of Oliver Wyman’s work from 2006. This is about Anglo-Irish Bank (2010 loss 17.5 billion Euros).

Business lending, its largest and most profitable segment, has grown by 38 % annually over the last 10 years. A centralized loan approval process has helped the bank maintain high asset quality and minimize the risks of portfolio concentration.

Unfortunately I gather that this report which declared Anglo-Irish to be the best bank in the world in 2006 somehow disappeared from their website so I am grateful to both FT Alphaville and whoever sent them a copy.

In my opinion Oliver Wyman after that report should be excluded from future work on bank audits not given it. It finds itself in a similar situation to the ratings agencies where catastrophic failure does not appear to be a barrier to future work. Indeed in something of a perversion of good business it seems to have encouraged new work.

How Much will Bankia need?

Whilst Spain’s Finance Minister was talking of 9 billion Euros only on Wednesday even the Vampire Squid (Goldman Sachs) estimated 13.5 billion Euros! And the latest estimates are for 15 billion Euros.

Spain’s FROB (Fund for Orderly Bank Reconstruction)

If we look at its financial position we see yet another lifeboat which may prove unstable in a crisis. It’s original capital was 9 billion Euros which it calls “strongly capitalised” in fact so strongly that this was increased to 15 billion Euros in February! So yes another entry for my financial lexicon.

Again in a regular theme for the Euro area you may not be surprised to read that the extra 6 billion Euros has not actually been paid.

Lets us play nicely and give them the benefit of the doubt and with its leverage capacity of three times we see that the FROB has 45 billion Euros of lending capacity of which it has spent approximately 19.2 billion Euros. You may by now be getting the idea of why Spain wants to downplay possible bank bailout costs.

Indeed the margin between the amount  of lending and the guarantee of 27 billion Euros by the Kingdom of Spain is thinning and disappearing. As it is incredibly unlikely that everything would be lost that is an amber light not a red one but the light will flash more brightly the more the 27 billion Euros is exceeded.

Also it is hard to put into words the stupidity of this.

This leverage capacity can be increased up to 6 times with the approval of the Ministry Of Economy and Competitiveness.

Yes we are back to my metaphor of an unstable lifeboat! If leverage of six times is okay why not have it now? Increasing leverage into a crisis is the sort of thing that Lehman Bros. ,Northern Rock, Anglo-Irish Bank and RBS managed, how did that work out? Waiting for a crisis and then increasing leverage would be an even worse tactic than managed by those lampooned as being on a “Ship of Fools”.

Spain’s banking system is seeing more bad debts

According to the Bank of Spain the percentage of bad loans rose to 8.37% in March which represented a further 4.15 billion Euros to give a total of 148 billion Euros. There remain doubts as to whether the full amount has been counted and of course there is Spain’s weakening housing market and economy.

Spain’s housing market

There is an ongoing debate about house price indices in Spain due to the way that Spain’s banks have dealt with problem loans/mortgages but we can learn somrthing from the latest data.

In the case of mortgages constituted for dwellings, the average amount was 103,782 euros, 7.8% less than in March 2011, and 1.0% less than that registered in February 2012.

It is not a perfect guide as we are excluding outright purchases but the fall in average mortgage size over the past year and month is hardly healthy.

The data also shows us that it is not only price which is being affected as the quantity of mortgages is falling too as Spain finds her weakened banks are willing to lend less and less in a familiar Zombie bank pattern.

The value of the mortgages constituted on urban properties was 4,351 million euros in March, indicating an interannual decrease of 42.5%. In dwellings, the capital loaned exceeded 2,586 million euros, 46.5% less.

Also we get a confirmation that cuts in official interest-rates do not seem to filter through to borrowers.

Mortgage interest rates

The average interest rate in March 2012 was 4.37%, indicating a 10.8% increase in the interannual rate, and 0.5% as compared with February 2012.

This theme fights with declines in real wages as the main theme of our times. Interest-rates may be cut in official terms but by the time they filter through market rates and reach the borrower they fall mush less and sometimes rise. This is one of the factors in what I described as a “liquidity trap” yesterday. In many respects what is called ZIRP (Zero Interest Rate Policy) is an illusion.


I find myself reviewing yet another Zombie bank today. But whilst the problems for Bankia are serious the real problems go wider. As we examine the Spanish banking industry we see dangers for the FROB and we see dangers of it being an unstable lifeboat which poses challenges for Spain as a nation. In some ways the Spanish authorities have been amongst the most enthusiastic supporters of kicking the can into the future and are suffering the consequences of the future being worse not better.

However let us think about Spain’s economy and bank lending. How much will Bankia be willing to lend and at what price? Once you begin to ask such questions you see an implicit cost of allowing Zombie banks and if history is any guide it will be a dragging anchor on an already weak Spanish economy. The price of failure to reform is a credit crunch which goes on and on and on…..

This entry was posted in Banking Reform, Banks, Euro zone Crisis, General Economics, Interest rates, Quantitative Easing and Extraordinary Monetary Measures, Recession. Bookmark the permalink.
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  • Miles Saunders-Priem

    The way I see it the Euro crisis will be resolved like this; ECB will force feed every bank to take some bailout money (a lot of it). That way (when things get bad and the FTSE 100 is somewhere around 3000) investors can’t really ‘tell’ which banks are bad and which are ‘good’. It happened in the USA sometime late 2008 or early 2009, so from all this confusion, this probably seems the likely outcome.

    Cue stocks rallying like mad come late 2013 or early 2014, and the whole thing starting all over again…

  • Anonymous

    This seems to just keep going on and on. Why do these countries keeping thinking that not telling the truth will do any good? All it does is make them look worse when the truth finally emerges which these days is often quite quickly.

  • Andy Zarse

    Hi Shaun

    Do you know how this new Special Purpose Vehicle the FROB is being leveraged? I assume the Spanish Govt and ultimately her taxpayers stand behind it? And what happens when they can’t afford the leverage, does one of the other Euro-lifeboats come to the rescue.

    I know you mentioned you had a Captain Scarlett SPV when you were a kid. Well, I had one too (still have it!), but I prefered my another somewhat gimmicky toy, which was also a sort of special purpose vehicle; a Corgi Yellow Submarine. It was crazy and even as a kid i could see how badly designed and unseaworthy it was! I took it in the bath one day, needless to say, it sank like a brick. The Beatles didn’t mind though, I think they were all off their heads on acid! All together now, ”It’s all too much!”

  • Rob

    I’ll see your 15 billion and raise it to 20 billion. Just for good measure Catalunya need 13 billion too. Andalucia will be next and surely Valencia.

    In October 2008 I wrote a comment on the Jeff Randall blog stating that unless ALL financial institutions/governments in ALL countries involved ‘fess-up’ to their real toxic debt liabilities there would be no solution to the problem. 
    I also said on here 21/06/2011, honesty with the taxpayers around the world (financier of last resort) should have been their priority and not obfuscation, the truth will out.

    PIIGS and USA will require milliards and billiards just like 1920′s Germany did. 

  • JW

    Hi Shaun
    Things are getting ‘Messi-er’ in Catalonia. Talk of having to re-hypothecate Barca’s star man.

  • Rob

    Hi JW,
    Nice one..!Spain is to spend half a Messi (52 million Euro) in materials and improvements to their Spanish embassies across the world. The figures show that 587,000 is to be spent on cutlery,towels and flags, excellent VFM. No wonder Spain wants Euro Bonds. 

  • Drf

    Hi Josephine29,

    Surely it is no different with the UK government and civil service not telling the truth, which they have now increasingly done for many many years?  They manipulate and distort all official government numbers and statistics to deceive the people. All politicians in the West are lying to attempt to conceal the results of their own protracted and continued incompetence.  Was it ever much different with any politicians?

  • Loafalot

    Hi Shaun,

    What is the position of Bankia bondholders in all this? Are they being made to share the pain, or are they (as has so often been the case throughout this depression to date … why?!?) being made whole on the backs of tax payers?

    I note the following from Dr John Hussman in his latest weekly letter: 

    “On an encouraging note, there is a clearer direction from the FDIC in how it would respond to a major bank “failure” (a word that is often thrown about to scare the public into accepting bailouts, but in nearly all cases simply means that the bank would fail to pay off its own stockholders and bondholders). Last week, Martin Gruenberg, the acting FDIC Chairman, outlined the planned response of the FDIC to the resolution of a “systemically important” institution:
    “The most promising resolution strategy from our point of view will be to place the parent company into receivership and to pass its assets, principally investments in its subsidiaries, to a newly created bridge-holding company.” In the process, shareholders would appropriately be wiped out, subordinated debt would be wiped out, senior unsecured debt could be written down to the extent that losses were still uncovered, and senior bondholders would get equity and convertible debt in the new restructured institution. Depositors would be unaffected, as would be other bank customers.”

    It’s about time banking bondholders started taking the pain rather than tax payers IMO. This should have happened from Bear Stearns onwards. Why didn’t it? Why should tax payers have paid the price for all this bad lending?

  • Rods

    Hi Shaun,

    Another very good blog, but events are unfolding very fast in Spain at the moment and sadly not for the better.

    Spanish bank inflation is out of control! What was €4.5bn last week, was €9bn on Wednesday, €15bn yesterday and maybe the truer (but probably only the first installment) cost of €23.5bn today for bailing out Bankia. 522% in a week!

    I see the ratings agencies are well behind the curve, yet again, by today only stating the ‘bleedin obvious’ by making several Spanish bank’s ratings junk.

    I’ve seen some figures today for the 2012 Spanish regions funding gap. Catalonia leads the way needing €13.4bn and without help will not be able to pay bills or wages due at the end of June. The total funding gap  for all of the regions for 2012 is €35.7bn! Ouch!

    With Spain’s estimated €184bn housing bubble hangover, it may be far worse as in your “expect the unexpected” world the bad figures are normally very conservative! So, how is the FROB of €27bn (and probably mainly used by Bankia) going to cope when the full force of this tsunami of debt hits them?

    Why are they repeating the mistakes as other countries with the debts falling on the shoulders of tax payers?

    This quote is appropriate for Spain’s troubles:
    “When trouble comes they come not in single spies but in battalion form” – William Shakespeare
    I think today’s song from Spain should be: “You ain’t seen nothin yet” by Bachman-Turner Overdrive

  • Anonymous

    Any advance on €23.5bn for Bankia as stated in El Pais headline Friday (but note that EP is a strong opponent of the current centre right government)? 

    We are finally seeing some of Spain’s dirty washing emerging into the light of day. This will prove to be a tiny proportion of the total (should they ever be forced to admit it), consisting as it does of state, bank, regional and local authority debts, all of them understated to a significant degree. Plus personal debt, itself rather dodgy with a large proportion of the population in the formal unemployed category.

    I note that the good old Spanish practice of stuffing unpayable invoices in a drawer is continuing and the numbers at regional level seem to be very large, in the €billions. [In the 'drawers', the invoices are excluded from the accounts payable systems.] Cheating is too nice a word for this, fraud would be more accurate.

    Come on Brussels, let’s hear some critical comment from you!

  • Anonymous

    Hi Shaun , so this bank was listed last year and subscribed at 60% to value AFTER bad loans were spun off to a holding entity funded by the sovereign…and now, it needs more capital…is that correct….

  • ExpatInBG

    I’d guess 20 Billion per dodgy building society (Bamkia had 7 merged) and round it up to 150 billion for good measure.

  • Anonymous

    Hi Miles and welcome to my part of the blogosphere

    One of the purposes of this blog is the theme that the sort of repeating cycle that you describe is not only plausible but actually very likely. The problem is that as each time we return to the same point we are increasingly indebted and therefore in a weaker position. This is why I argue for a change of tactics and strategy or more accurately to have a strategy!

    I notice that you say “good ” bank and I agree with the implication that such a concept is relative rather than absolute….

  • Anonymous

    Hi Andy

    I did indeed have an SPV as a child and indeed also the red patrol car that Captain Scarlet used to drive..

    As for the FROB it borrows in addition to its capital base but its own data says that it has 14.2 billion available immediately which as since then it has promised a total of 23.5 billion to Bankia you may spot a catch here!

    In addition to the 27 billion Euro guarantee that I mention in the article it is insured against losses by the Deposit Guarantee Fund which I think will need looking into now too.

    In my opinion the FROB needs more explicit capital and fast and for now Spain will probably give it but yes the EFSF/ESM may be called on.

  • Anonymous

    Hi Rob

    I can only agree but if I may be so bold the total for Bankia has been raised to 23.5 billion Euros. It feels just like poker doesn’t it?

    Whilst we are at it I have quadrillions revved up and ready! (With apologies to Clare who if I remember rightly pointed out that the numbers were getting harder and harder to have any grip on)

  • Anonymous

    Nice touch and the story of the loan to buy Ronaldo being pledged at the ECB has returned. I remember pointing out some time ago that the ECB could have quite a football team soon!

  • Anonymous

    Hi Shire

    Yes Sir as the definition of bad loans finds its way into my lexicon for a new financial era.

    Definition of total bad loans: the minimum we think we can get away with declaring…

  • Anonymous

    And yet Rajoy is still maintaining that Spain will not need a bail out and can manage everything required all by itself. Well that might be true on the published figures, perhaps Sr Mariano hasn’t yet grasped the sheer size of the Spanish hidden/misclassified debt problem. If not, he will, and soon.

  • Anonymous

    Hi Loafalot

    You are asking a question which has been avoided so far. The Too Big To Fail or TBTF strategy involves keeping telling us that banks such as Bankia are viable whilst feeding them taxpayers cash! If the bank is viable then the bondholders are okay as the clauses where they lose money involve it being unviable. You could say this is a deliberate misrepresentation…

    So when a bank collapses both shareholders and bondholders may feel “cheated” and that is how we ended up in the UK with investors suing when Northern Rock shares were zeroed.

    So bondholder survival is a direct consequence of political misrepresentation and failure to face reality. Going forwards it will be interesting to see what Spain does, will it have the courage to invoke clauses on bondholders and declare the shares as worthless? If it does this (which it should in my view) then we will have seen a hopeful change of strategy.

    With the size of the Bankia bailout Spain faces this problem right now.

  • Anonymous

    Ah yes Smashie and Niceys favourite song and yes if Bankia continues to follow the pattern of Anglo-Irish Bank then we have not seen anything yet.

    I see little discussion of it in the media but Spain may already be talking with the EFSF/ESM….

  • Anonymous

    Good point Barncactus

    Brussels was very critical of Hungary so it is not as if they do not know how to do it….

  • Anonymous

    Hi Shaun,

    Now to the really important thing in Europe… Eurovision. I know how you like to tie in economics and music! I always like to look at the songs and see if there is an emerging theme; messages from one to another. Last year we had Spain sending a group dressed as representative workers who marched with placards as they sang that they were never going to be defeated for instance.

    This year we have a distinct lack of cheery pop or disco and many a strangled, histrionic ballad begging for one more chance.  A plethora of songs pleading with people to ‘stay’, ‘don’t leave’ and ‘stick with me please’, we can make it through. Hungary offers the helpful suggestion that hearts will beat together and see us through the hard times. However Germany, sorrowful but resigned, sing of staying still and watching their loved one walk away, it is the end, there is nothing more to do or say….



  • JW

    Hi Shaun
    Just heard that Japan/China have agreed to currency trades without dollar cross rates. End of the dollar reserve currency? 

  • Anonymous

    Hi Clare

    You would have liked one of my past colleagues and friends as he was an analyst of such things, music dress etc and what the trends meant. For example “Dont Worry,Be Happy” by Bobby McFerrin was a clear signal of the times for that type of analysis…

    In a sign of the times I gather than Spain did not want to win so that they did not have to pay for next year’s event in a time of austerity and cut-backs.

    But I cannot move on without referring to this entry by Montenegro. And was it a signal that it failed to progress beyond its semi-final?

    EURO neuroEuro neuroEuro neuroMonetary brake danceEuro neuroEuro neuroEuro neuroGive me chance to refinance

  • Anonymous

    Hi JW

    It’s a slow drip-drip isn’t it of various deals being undertaken often in the China/Japan/india axis but also with an honourable mention for Iran!? Those who rely for their analysis on the US $ being the world’s reserve currency may wake up one day and discover that their theories, America can print money forever, borrow as much as she wants etc., were built on reserve currency sand…..

  • Loafalot

    Hi Shaun,

    I don’t understand why invoking clauses on bondholders requires courage? I mean, equity holders, junior bondholders, senior unsecured bondholders, etc … these are each merely part of the capital structure of the bank(s). The people & institutions who invest in these instruments presumably do so of their own free will. They knowingly take the risk in exchange for the anticipated return. If the bank subsequently blows up then those investors didn’t do enough due diligence prior to investing, or didn’t provide sufficiently rigorous oversight of the lending & funding processes. They thus lose some or all of their investment. Tough cookies, that’s how capitalism works!

    I can kinda see why this hasn’t happened (because the banksters own lots of the bonds and the banksters ‘support’ the politicians via ‘campaign donations’, so in return the politicians bail out the banks with public funds). What I don’t understand is why our mainstream media hasn’t shouted about it from the rooftops. Year after year we tolerate all the dross dredged up by a free press IN ORDER that come the day when democracy / the people are really in danger, that same free press will be there to draw attention to the threat, loud & clear. Well, here we are boyz, it’s time for you to stand up & be counted! When you look at events since 2007 it is clear to me that the politicians & banksters across The West have been engaged in hugely risky behaviour (JPM, LTRO, worldwide QE-on-steroids, etc, etc?!). So where is the BBC? Where is our free press? Why are the tax payers still expected to pay to protect banking bondholders?!?!

  • Walt Kowalski

    Morning Shaun– excellent article as always. I’m getting that “Programa SMP Por Espana” feeling.. what say you ?? LTRO isn’t working; as bonds sink, so goes the banks who participated in this backhanded “purchase assistance program”. SMP seems much cleaner, is relatively quiet and does not have the word “bailout” attached to it. Just my $.02

  • JW

     Hi Lafalot
    If I may add my input.
    When the problem first exploded in the States it was the case that Government, ie tax-payers , were left holding the can for all the bail-outs and not just banks. Shareholders have lost out, but bond holders have been largely protected because of their legal status in entities that were not allowed to go bust.
    Mainly the same in the UK and until recently in the EZ. However the 2nd Greek bail-out demoted the commercial ( especially overseas) bondholder in favour of the EZ institutions. This action is probably illegal and there are legal actions in place. The result has not helped taxpayers in Greece or elsewhere in the EZ , but it has meant that normal commercial markets for new bonds in the country’s most in need of them have been closed off as no international purchaser will take the risk of illegal action.
    Like you I feel the taxpayer should not be left holding the cost,  but removing normal protections for bondholders is the worst way to do it. If the banks were just left to go bust there would be no issue, bondholders would suffer like all stakeholders. But to zombie-fy the banks , keeping them alive with subsidies and at the same time illegally demoting the legal rights of a class of stakeholder is wrong and ultimately very very stupid.

  • Anonymous

    Hi Mr K and thank you

    As you know the Euro area is rarely short of silly ideas. The latest appears to be the EFSF bailing out Europe’s banks or for the moment Spain’s banks. Except it is going to be a type of insurance which leads to 2 flaws.

    1. Insurance requires a spread of risks rather than virtual certainties.

    2. Who will pay?

    In many ways your proposal of firing up the SMP again does have advantages except this time the losses will be too large for the ECB to shuffle to the EFSF.As Euro leaders rarely look further forwards than right now the SMP could yet find itself returning to the role of temporary (their definition not mine!) stop gap..