28/5/2012: It's the story of the euro crisis: for every problem solved, two new ones emerge. So it is with the recapitalization of Bankia. Madrid's decision Friday to provide €19 billion ($23.78 billion) of new capital to Spain's largest domestic lender is a major step forward in confronting the country's four-year property bust. But it has left the government nursing a number of fresh headaches that it looks increasingly unable to treat on its own, The Wall Street Journal Heard on the Street blog reported.
The first concerns the read-across to other Spanish banks. Only a month ago, Bankia was proposing to pay a dividend. Now Bankia and its parent Banco Financiero y de Ahorros are taking a combined €17 billion of new write-downs on troubled real-estate exposure and other loans plus €7 billion of mark-downs on investments.
That is enough to wipe out their entire book value in the same way that those of savings banks Banca Civica, Unmin and CAM were written down to zero after their recent acquisitions. That raises fresh doubts about the reliability of Spanish banks' balance sheets.
Following the latest write-downs, BFA-Bankia will have set aside provisions to cover losses equivalent to 48.9% of its real-estate exposure —likely to be enough to satisfy markets. But extrapolating these write-downs to other banks suggests a further €45 billion of further provisions are required across the sector, according to UBS.
The second headache concerns how Madrid should finance the capital injection: via cash or government bonds. With Spanish 10-year government bond yields now at 6.45%, Madrid is naturally reluctant to risk raising cash in the markets. But providing Bankia with government bonds will only increase Bankia's exposure to the sovereign at a time when Spain's solvency is also being questioned.
Banks don't have to mark government bonds to market, but they do have to show losses in a separate reserve. If this number is sufficiently large, it could further deter bond investors, leaving Bankia still reliant on central-bank funding. That would defeat the object of the exercise.
That points to a third headache. Prime Minister Mariano Rajoy said Monday he believed the euro zone should allow its bailout funds to recapitalize banks directly. That would make it less likely Madrid itself loses market access. But before the euro zone agrees such a move, it might question why BFA-Bankia isn't wiping out existing shareholders and preference shareholders and imposing haircuts on bondholders.
Madrid argues this would undermine the long-term value of the bank because many of its investors are retail customers. But that argument may not cut much ice with taxpayers in Berlin. Read more. (Subscription required.)
