Outlook on Spain worsens, as government bails out Bankia

The outlook for the Spanish banking industry is turning ever more negative, following the decision by the Spanish government to proceed with a state bail-out of Bankia, one of the country’s biggest banks by assets.

According to press reports, which the Spanish government is not confirming or denying, the state bail-out will be completed on May 11, with an injection of liquidity between €7bn and €10bn.

Bankia was formed in 2010 following the merger of seven Spanish savings banks (cajas) and has already received more than €4bn in government aid.
It has a €31.7bn exposure to real estate toxic assets against a total sector exposure of €184bn.

As part of the intervention, Jose Ignacio Goirigolzarri, former chief executive of rival bank BBVA, is set to replace Rodrigo Rato as chief executive of Bankia, following Rato’s resignation on May 7.

On April 25, in a report on the Spanish financial sector, the International Monetary Fund warned that while the largest banks of the country appear sufficiently capitalized and have strong profitability to withstand a further deterioration of economic conditions, vulnerabilities remain in other banks that are reliant on state support. The report said that the sector as a whole remains vulnerable to sustained disruptions in funding markets.

“The past four years have witnessed a crisis of unprecedented proportion in the Spanish financial sector in its history. While external factors contributed to the turmoil, significant risks posed by a real estate boom-bust cycle, which materialized in the savings bank sector, exposed weaknesses in the policy and regulatory framework and an over reliance on wholesale funding,” the report said.

The institution also identified Bankia as the largest risk to the stability of the Spanish banking sector, and the IMF recommended swift and decisive measures to strengthen their balance sheets and improve management and governance practices.

“Aside from France and Greece, Spain is now in centre stage. News that public money will be used to bail out Bankia is the latest test for the Spanish government. It is hoped that the injection of funds will help clarify Bankia’s position. The risk, however, is that investors will see this as a signal that more bad news will follow from Spain’s banking sector,” said Bill Hubard, chief economist at Markets.com

Over the last weeks, a number of asset managers have expressed an increasingly bearish view on the Spanish market, with most investment banks such as HSBC and UBS warning investors on the potential risks of the Spanish banking sector.


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