Brussels poised to axe Spanish ailing banks

Spain banks

Caja CAM

It bothers Competition Commissioner Joaquín Almunia very little to become thoroughly unpopular among his fellow countrymen. He has underlined in a rather blunt way the huge scope of sacrifices to be imposed on troubled banks as well as on their share and subordinated debt holders. Employees to be fired are also likely to receive a harsh medicine as their indemnities might only amount to a fraction of the fat payments received in similar cases up to now.

As restructuring aid would be provided on a staggering scale, it will undoubtedly involve a massive competition distortion much to the detriment of other players. There is a clear case for downsizing the beneficiary, especially in those markets where its revamped muscle might inflict more damage.

It comes as no surprise that the competition watchdog might ask for a 75% cut in wholesale banking, plus a disposal of shares on the investment portfolio. Bankia is poised to suffer from this dwarfing exercise. Other former saving banks being rescued are also likely being forced to concentrate their business on their regional strongholds, disinvesting their network and subsidiaries stretched beyond their home territory.

It makes sense that tough precautionary measures are taken to avoid that the substantial public support channelled to them might end up being used in  competing on more favourable terms with other banks. The economic rationale would condemn them to file for an outright bankruptcy. Assuming the systemic costs linked to any banking collapse might exert a shock-wave hitting other solvent players, rescue could be regarded as a reasonable option. So long that those drifted to the save shore with taxpayers’ money pay a price for it in terms of substantially lowering their business capacity.

But Almunia enters into more hazardous territory when trying to make life miserable to individuals. Take for instance the employees’ indemnities. Should they receive a better treatment than the general rules allow for, the gap would indeed be regarded as state aid. But in any standard restructuring scheme such social support would be considered as fully compatible so long it entails deeper compensatory cuts in banking business.

Much the same can be said on share and subordinated debt holders. While no one contests that European partners cannot be obliged to foot the bill of a skewed burden sharing favouring them, nothing prevents Spain from implementing such an uneven treatment. Messages coming from governmental circles make this scenario the most plausible one. After all, facing angry small investors is a prospect any  politician wants to avoid.

We will shortly know the final outcome of current discussions. If it does not markedly depart from what is being currently leaked, rescued entities are bound to be sharply downgraded both in size and business performance. For all the efforts they undertake to reinforce their solvency and profitability, troubled banks are not likely to survive unless they merge into solid groups. One wonders if public money to maintain them artificially alive should not be entitled to a better use.


About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.