by Richard Bayston
Bankia’s declaration of bankruptcy at the end of May can now be seen as the final step of the slide of the Spanish banking system into complete dependence on the State… and the State asking for funds to the EU.
Just like RBS in Britain, and just like the events of 2010 in Ireland, the State has stepped in to support the collapsing financial institutions that are regarded, in a now infamous phrase, as ‘too big to fail.’
While the €100bn bailout deal has propped up the financial sector the future of the rest of the country remains uncertain, but such a deal leaves Spaniards themselves paying the debts of their banks.
This is expected to negatively impact both Spanish standards of living and property prices.
The origins of an announced disaster
The origings of Bankia lie in a marriage of convenience between seven ailing Spanish savings banks. The organizations involved were Caja Madrid, Bancaja, Laietana, Caja Segovia, Caja Vila, La Caja Insular de Canarias and Caja Rioja.
But these institutions arrived at the altar troubled. At the time of Bankia’s creation, Caja Madrid was the most controversial savings bank in Spain, riven with internal power struggles ultimately traceable to the fact that the General Councils of Spanish saving banks are formed by politicians.
Meanwhile, in the summer of 2009 Caja Madrid lent €76.5m to Real Madrid to pay the transfer of Cristiano Ronaldo, at a time when Spain was becoming immersed in an economic depression and unemployment was rising. Another of Bankia’s constituent institutions, Bancaja, was in serious financial difficulties resulting from soft lending during the Spanish property boom.
But these obvious problems were not what brought Bankia down. Each partner in the union arrived with a dowry for the others in the form of unserviceable debts. Bankia experienced strong early trading on the Madrid Stock Exchange, but this turned out to be a Spanish bubble in microcosm, and by May 2012 Bankia was asking the Spanish government for €9bn, increased a few days later to €19bn, on top of the €4bn the government had already spent to shore up Bankia.
Prime Minister Mariano Rajoy’s government is repeating the message heard from states across the Eurozone: No bank may be allowed to fall, because ‘if that happens,’ as Mr. Rajoy explained a few days ago, ‘the country will fall.’ That was the same message Ireland’s leaders were enthusiastically preaching, as they hoisted the debts of the Irish banking system onto State shoulders too narrow to support the burden.
But by the end of 2010 markets had lost faith in Dublin’s ability to repay, and it was strong-armed into a Eurozone rescue loan. The promise that no bank will be allowed to fall is the ball and chain that pulls a whole nation over the cliff after its banking system.
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