By Carlos Díaz Güell, in Madrid | After Merkel and Sarkozy's meeting, the European Commission last week launched its strategy about a bank recapitalisation that should cover “all potentially systemic banks” and must take into account “any exposure to sovereign debt,” which is the reason why the Tier 1 capital ratio required must be raised “temporarily but significantly” for our financial institutions.
The Commission also wants banks that do not have the capital needed submit recapitalisation plans and until they do so, the national regulators will forbid them to pay dividends and bond interest.
It is not clear whether Merkel, Sarkozy and Jose Manuel Barroso are aware of the folly of their proposal. Many people consider its implementation would imply the collapse of economies such as Spain's, because the financial system would be devoted to sovereign debt provisioning with the scarce resources available that at the moment are employed in keeping on its feet the ailing economy. It could also mean the end of banking as we know it today, and its “Argentinisation”: a system in which banks just give credit and business is based on commissions instead of financial margin.
What the European luminaries have done is breaking a fragile balance that accepted that the European banking problem was the Greek, Irish and Portuguese debt, while the Spanish one was the construction sector that did not question at any time the Spanish bonds' health.
The president of Banco Popular, Ángel Ron, is the only Spanish banker that has said it like it is:
“A ridiculous assumption is being converted into the market's assumption, forcing institutions to recapitalise and tell them to go to the market that, of course, will invest capital knowing that if the institution does not reach the limit, it will not be able to pay dividends. Since nobody in his right mind is going to invest a penny there, it all will obviously end up being a public recapitalisation. And how is the recapitalisation going to be financed? With more public debt. I doubt anyone believes that the EFSF comes out of nothing and costs nothing. And besides, banks will not give more credit, because to avoid suffering the punishment that involves taking public capital they will delever
age without control… So then, who is going to fund the states?”
SPAIN WILL SUFFER
However, the EC's Barroso expressed his support to the European Banking Authority's (EBA) intention of setting the new threshold for core tier 1 at 9%, compared to the 5% applied in the July test, which would mean that, if that scenario came about, the Spanish banks could need up to 58,000 million of euros. Taken together, the European financial sector would need to obtain €297,800 million, according to Goldman Sachs.
Spain is the second most affected country, after Greece that would need €64,600 million. After Greece and Spain, it would be Germany (€43,300 million), France (€40,400 million), UK (€32,600 million) and Italy (€32,100 million).
Meanwhile, not a penny for the real economy.
There is strong evidence that a new revolution in the financial system is about to take place that will make the 80's and 90's crisis look as minor accidents. For the Commission's proposed recapitalisation is synonymous with restructuring: more mergers and acquisitions, but this time mixing savings banks with banks.
The process of consolidation and privatisation is generating a more rational system, which could result into an oligopoly where there would be only room for the big entities with a powerful international profile.
Meanwhile, and just a few days after the Bank of Spain completed the first stage of the financial system reform, the shadows of doubts about the health of the Spanish banks’ balance sheets have seized the markets precisely as a consequence of those €110.000 millions for core Tier 1, with a provision equivalent to 35%.
After Caixabank’s split and Bankia’s IPO, 40% of the former saving banks system is listed and “on the market”. The regulatory changes, according to which most of the saving banks have or will become into private banks, mean a huge advance to solve the problem. Also, the initiatives to stop the debt crisis or the new stress test patterns add to the positive side. Even the postponement of the next EU summit to October 23 can be a way to agree a more convincing and detailed plan.
But the possibility of a Greek debt haircut of 60% makes it very clear that at the heart of the problem there is still mistrust over the sustainability of public finances, particularly of Greece. Just a recapitalisation is not a sustainable solution.