First up, lemme give y'all a quick history lesson on Bankia.
Bankia was formed back in late 2010, as a merger between seven cajas. No I ain't talking about houses like in Game of Thrones - I'm talking about savings banks! In any case, the belief was that the banking conglomerate would stand a better chance of surviving the economic recession than each of the banks individually.
Unfortunately, the housing market continued to collapse and with the introduction of higher capital requirements in Europe, Bankia was put in a very deep hole. When auditor Deloitte hinted that Bankia's assets were inflated by 3.5 billion EUR and that half of its 37 billion EUR in real estate exposure was problematic, the Spanish government knew they had to step in.
And they did just that. Earlier this month, the Spanish government converted its 4.5 billion EUR worth of preferred shares in Banco Financiero y de Ahorros into common stock, effectively giving it a controlling share of 45% in Bankia.
That's how we got to where are today. The problem now though, is that Bankia just requested an additional 19 billion EUR to help reduce its exposure to property and residential loans.
And instead of tapping the Fondo de Restructuracion Ordenada Bancari (the government's bank recapitalization fund), the Spanish government is looking to...gulp... fund Bankia through the issuance of public debt! The idea is that Bankia will be able to uses these loans as collateral to borrow even more from the ECB to recapitalize itself.
Naturally, this phenomenon spooked investors and caused bond yields to soar. Yesterday, Spain's 10-year bond yields hit a new high of 6.445% as investors demanded additional returns to compensate for the increased risk of holding Spanish debt.
This also reveals that market participants are wary about the stability of the Spanish government, as they are worried that the 19 billion EUR bailout might not be enough and that the government will have to dish out even more funds.
What makes this situation even worse is that, as investors keep worrying and sovereign yields keep rising, the Spanish government would have a tougher time repaying its debt. In turn, this drives yields further up, eventually adding strains on the entire banking system. It's a vicious cycle, I tell ya!
This is probably why Spain is putting a lot of effort in preventing Bankia from going bankrupt. After all, Bankia is Spain's fourth largest bank and is essentially comprised of the seven cajas or regional banks. If Bankia files for bankruptcy, it could trigger a bank run among other smaller regional banks.
Aside from that, a shutdown in one of Spain's major lenders would dry up liquidity in the economy. As we all know, the Spanish economy isn't exactly on stable footing at the moment and the last thing they need right now is another economic problem that could push them deeper in the rut.
With that, it is possible that the Spanish government could dole out another round of capital to Bankia and probably to other large banks as well. What they need right now is to prevent the markets from panicking in order to keep those rising yields in check. Otherwise, a series of bank failures would most likely push Spain over the brink and cause its economy to go into an extended siesta.
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