After IMF’s verdict, what’s next for Spanish banks

The biggest challenge is to set the bad bank amid the ongoing correction of the housing market, which has already been battered: the number of monthly transactions has plummeted about 70 per cent and prices have fallen about 30 per cent since 2007.

For the IMF, “it is imperative to swiftly recapitalize and restructure or resolve the weakest banks,” said the report. It was published just several hours after the European Commission had approved restructuring plans for four Spanish banks: Bankia, Novagalicia Banco, Catalunya Banc and Banco de Valencia.

All these entities will get funding from the European Stability Mechanism as part of the bailout deal of €37 billion ($47.84 billion). But their bondholders will face losses and their balance sheets will be reduced by more than 60% over the next five years.

Bankia will suffer the deepest cuts: 6,000 employees, over a quarter of its work force, will be laid off. The bank predicted it would return to profit next year and reach earnings of €1.5 billion by 2015. Novagalicia Banco and Catalunya Banc will also cut jobs and impose losses on their creditor bondholders. The smallest one, Banco de Valencia, will be sold to Caixabank for a symbolic one euro.

So what’s next? We’ve drawn a guide to understand the current situation of financial and credit institutions in Spain, and what can happen. Of the 14 Spanish banks assessed by audit firm Oliver Wyman, half were not in need of any emergency funds, including the three leaders: Santander, BBVA and Caixabank.