Spain will make an emergency €19bn investment in Bankia, the stricken savings bank, in a bold bid to restore confidence in the stability of the country’s financial sector.
Madrid’s biggest bank nationalisation will take the total amount of state aid pumped into Bankia to €23.5bn, and will give the government as much as 90 per cent control of Spain’s second-largest bank by domestic deposits.
This represents an approximate four-fold increase in the amount of assistance this month. And who says this is the end?
And it’s not just the banks. Regional governments are demanding bailouts:
Financial markets were further rattled by comments from Artur Mas, president of Catalonia, which forms a fifth of Spain’s economy and is larger than Portugal by output, that the region was running out of options to refinance its debts, and wanted backing from Madrid to borrow.
The Alfred E. Newman crowd often points to Spain’s relatively low debt-GDP ratio to downplay concerns that the country may turn into Greece on steroids. But the developments with the banks and the regions is misleading. There are massive contingent liabilities that should be added to the Spanish balance sheet when evaluating the country’s fiscal position.
What is transpiring there reminds me of the banks that set up off balance sheet SPVs, and then brought them back on balance sheet at the height of the crisis. Creating the SPVs made the banks look less riskier and better capitalized than they were in fact. Spain is now in the process of bringing its own equivalents of SPVs-its big banks and big regions-onto its balance sheet. The results are unlikely to be pretty.