Spain to overhaul rescued banks as condition of aid

BRUSSELS/MADRID Wed Nov 28, 2012 12:51pm EST

1 of 2. A man pushes a pram past a Banco de Valencia bank branch in Madrid June 25, 2012.

Credit: Reuters/Andrea Comas

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BRUSSELS/MADRID (Reuters) - Three nationalized Spanish banks will more than halve their balance sheets in five years, cut jobs and impose losses on their creditor bondholders in return for a euro zone rescue, while a fourth will be sold off, the European Commission said.

The measures, approved by the Commission on Wednesday, are a condition of 40 billion euros ($52 billion) in aid that offers hope for an end to a banking crisis which has pushed Spain to the brink of a sovereign bailout to keep the government afloat.

The plan sets in motion one of the biggest overhauls of any European banking system since the financial crisis began in mid-2007 with the near collapse of German lender IKB.

"Our objective is to restore the viability of banks receiving aid so that they are able to function without public support in the future," said European Union Competition Commissioner Joaquin Almunia.

The Spanish state took over Bankia (BKIA.MC), Catalunya Banc, Banco de Valencia BVA.MC and Novagalicia Banco - which is also known as NCG Banco - after losses on lending during a decade-long property boom left them dangerously short of capital.

The four banks account for just under a fifth of Spain's banking system. They must transfer 45 billion euros of soured property assets to a "bad bank" as another condition of receiving the aid.

The smallest of the four, Banco de Valencia, will be sold to Caixabank (CABK.MC) for a symbolic one euro and cease to exist as a separate entity, while the other three must cut their balance sheets by more than 60 percent over the next five years.

Shares in Banco de Valencia, which had been suspended on Wednesday morning, dropped by more than 16 percent after they resumed trading, to 0.152 euro per share.

The International Monetary Fund (IMF) said on Wednesday that Spain's financial sector reform is on track and all deadlines have been met so far, but difficult steps remained while risks for the economy and the country's lenders remain high.

JOB LOSSES

Selling Banco de Valencia under a loss protection scheme will be cheaper than winding it down, the Commission said. Spain has also agreed to sell Novagalicia Banco and Catalunya Banc within 5 years or liquidate them, Almunia said.

The nationalized banks will have to close up to half their branches during the five-year overhaul, resulting in thousands more job losses in a recession which has already pushed unemployment up to 25 percent.

The biggest of the banks, Bankia, said it would lay off 6,000 staff - over a quarter of its workforce - and reduce its branch network by around 39 percent under a plan to return to profitability by 2013.

"Our clients can be totally reassured because we have a viable and solid business in which they can be absolutely sure of their savings," said Chairman Jose Ignacio Goirigolzarri.

Bankia, formed from the merger of seven savings banks in 2010 and taken over in May in Spain's biggest bank rescue, said it would shed 50 billion euros of assets. These include stakes in insurer Mapfre (MAP.MC) and airline International Airlines Group (ICAG.L) plus its business in Miami in the United States.

Public debt holdings would fall to 30 billion euros from 40 billion now, Bankia said, while shareholders will contribute 10.7 billion to the clean-up. Bankia shares fell 4 percent.

Holders of Bankia's hybrid debt would contribute up to 4.8 billion euros to the recapitalization through losses incurred by swapping their holdings for shares, the bank said.

The Commission said the cost to hybrid and subordinated bondholders in the restructuring of all four of the nationalized banks will come to about 10 billion euros.

Many hybrid debt holders are retail customers who say they were conned into buying complex financial instruments that buoyed the banks' capital levels, instead of putting their money into fixed-term savings accounts.

The Spanish government, fearing a political backlash, fought for these losses to be minimized, but Brussels insisted the subordinated bondholders share the pain in order to keep the use of taxpayers' funds to a minimum.

Almunia, a former Spanish government minister, said he would decide on other Spanish banks with capital shortfalls on December 20. Banco Popular (POP.MC) has carried out a 2.5 billion euro share and rights issue to avoid the need to seek state aid. ($1 = 0.7733 euros)

(Additional reporting by Robin Emmott in Brussels and Jesus Aguado in Madrid; editing by Anna Willard and David Stamp)

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Comments (2)
breezinthru wrote:
This is what should have happened to America’s megabanks in 2008.

Instead, we nationalized only the banks’ debt and left the money generating apparatus and control of pay and bonuses in the hands of those who piloted those banks and our nation’s economy into the ground.

Nov 28, 2012 6:30am EST  --  Report as abuse
dareconomics wrote:
Greece has been dominating the eurocrisis over the last few weeks, so now it is Spain’s turn. The European Commission approved a €37bn payment to Spain’s bank rescue entity FROB, which will give Bankia and three other basket case banks capital.

The banks have agreed to shed staff, branches and assets and reduce their business lines in the exchange for the money. They will fire about a quarter of their employees and shutter more than half their branches. Additionally, they will no longer make real estate loans focusing on retail, small and medium size business lending.

The bankers and politicians associated with this deal are making wildly optimistic forecasts of a return to profitability by next year. How this will be accomplished amidst an economic depression in Spain and a severely constrained business line remains to be seen.

This deal has two major consequences. The funds are being disbursed from the ESM to Spain’s FROB and then to the banks. This structure means that the bank rescue will raise Spain’s debt to GDP ratio by about four points. The other unavoidable consequence is the evaporation of thousands of well-paying jobs in country with an unemployment rate of 25.4%. This round of layoff alone will raise the rate to 25.7%.

There is a report from the Oliver Wyman consulting group that claims Spain will only require €59.7bn to shore up its banks. The mainstream media repeats this number with no critical analysis. It is a virtual certainty that Spain will need over €300bn based on the amount of real estate loans in the system.

Does anyone remember the subprime crisis? The numbers were small at first, but within 18 months all the major U.S. banks were essentially nationalized by the federal government. Here is how Citibank’s descent to insolvency unfolded:

10/2/2007: $5.9bn in mortgage write-downs announced. The New York Times reported, ” Investors took the disclosures as a sign that the worst may be over for the banks and that any losses may be contained.”
7/8/2008: $12bn more in write downs announced
10/16/2008: $13.2 more in write downs announced
11/24/2008: Citigroup is rescued by the federal government with a $20bn capital injection and a loss shield on an additional $300bn in bad assets.
Total Write Downs: $39.1bn

Once a banking crisis starts, losses become progressively worse and continue past everyone’s worst case scenarios. This chart from ZeroHedge illustrates the Spanish banking crisis:

(Chart is here

http://dareconomics.wordpress.com/2012/11/28/european-commission-approves-bailout-of-four-spanish-banks-nytimes-com/ )

The gross amount of bad loans is €182.2bn out of about €1.7trn in total loans. Bad loans have doubled in the last year, and a conservative estimate has them doubling again in the next six months and rise even more from that point with the history of the American subprime crisis repeating itself. When all is said and done, Spain will need over €300bn to clean up its banking sector. At least Bankia will return to profitability next year.

Nov 28, 2012 12:33pm EST  --  Report as abuse
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