The European Commission approved a 37 billion euro bailout package for four Spanish banks yesterday but the rescue package is very different from Greece’s rescue this past Monday.
When Mr. Rajoy, Spanish Prime Minister, refused a bailout package offering from the European Central Bank (ECB) on October 29, he was relying on the creation and the authorization of the European Stability Mechanism (ESM) to directly recapitalize troubled banks thereby bypassing strict austerity measures and national budget reporting imposed by the Troika, the international lenders of the ECB, IMF and EU. It now seems he made a very safe and calculated bet.
The ESM will directly recapitalize BFA Bankia, NCG Banco, Catalunya Banc and Banco de Valencia, totaling 37 billion euro.
Part of the package is a mandate by the ESM that 45 billion in current bad loans will be transferred to SAREB (Sociedad de Gestion de Activos Procedentes de la Reestructuracion Bancaria), the Spanish equivalent of an AMC or Asset Management Company who will oversee the sale of the foreclosures and/or short sales.
It is not known at this time whether individual investors will have access to the properties in question or at what discounts such will be sold by the AMC.
The second requirement is that all four banks reduce their assets by 60% from their 2010 levels by 2017.
The resulting haircut will mostly affect regular depositors who in exchange for a proposed 10% to 45% cut will receive apportioned shares in the same bank.
This will mean that original depositors may continue to lose value in the near future as banks continue to adhere to the proposed downsizing but if the restructuring succeeds as planned, such losses may be recuperated by long term gains in share prices.
The ESM bailout is a windfall for Spain as the Spanish Government will not be required to report the borrowed funds on its annual budget or in its debt/GDP ratio calculations as is the case in Greece.
It may seem that the Spanish rescue plan is one of preferential treatment of one of the Eurozone’s members but then again we should take into consideration that Spain is the Eurozone’s fourth largest economic engine and far more important to the survival and stabilization of the Eurozone than Greece.
Spain’s economy is also in better shape than Greece even though the country continues to struggle with high unemployment, currently at 25%, that primarily affects ages 25 and under where 50% continues to look for full-time jobs.
While Christine Lagarde, IMF Director, indicated that Spain has made important progress, the challenge will be how effective the AMC will be and whether the bailout will restore confidence in Spain’s financial sector.
Written by Nick Doms © 2012, all rights reserved.
