Spain has bought time. Bankia, the nationalised mortgage lender, is to receive a much-needed recapitalisation to boost its capital reserves, after booking a massive 4.4 billion euro loss in the first half of 2012. But the money will come from the Spanish government, not from the euro zone countries that agreed to rescue the country’s banks with a 100 billion euro bailout in July.
That looks odd. The memorandum of understanding signed with euro zone authorities allowed for an upfront 30 billion euros to be tapped “in case of emergency” if a Spanish lender gets into difficulty before the details of the Spanish bailout are nailed down – which won’t happen before the end of September.
Bankia’s results certainly look like such an emergency. The bank saw 8.3 billion euros’ worth of private deposit flight in the six months to June, and its use of liquidity from the European Central Bank shot up by 258 percent. The catalyst for its bailout was a capital ratio falling from 8.3 percent to 6.3 percent in the same period. Bankia hasn’t said how big its capital injection will be, but it would need roughly 5 billion euros to get back to where it was.
Why the do-it-yourself approach? It could be that euro zone lenders shifted their position on whether the emergency cash was indeed immediately available without more detail on conditions. But it may also have a lot to do with domestic politics. The euro zone is only prepared to inject 100 billion euros into Spanish banks in return for Madrid setting up a bad bank for duff property loans and inflicting losses on the holders of debt-like preferred shares. That is a political minefield, as those bonds were sold to retail depositors.
By recapitalising Bankia with its own funds, Spain may be trying to buy time by working out a way to haircut creditors only to pay them back over time. Alternatively, it may be trying to ring-fence Bankia from any forthcoming haircuts, given that the stricken bank has a big chunk of the preferred shares.
If so, the losers will be the Spanish taxpayers who don’t hold the Bankia instruments, as well as euro zone finance ministers, who could look like they are not on the ball. Bankia may be a special case. But it will not do much to repair Prime Minister Mariano Rajoy’s difficult relations with his euro zone peers.