Spain rescues bank as spectre of Irish property crash looms

Prime Minister Mariano Rajoy reassured Spaniards the banking sector was safe despite the country’s biggest bank bailout. Bankia holds 10 per cent of the deposits in Spain’s banking system and is the largest of eight Spanish banks rescued in recent years.

“Bankia has ended up in state hands because nobody accepted the reality of its financial situation in time,” said an editorial in El Mundo newspaper, generally sympathetic to the ruling People’s Party.

Irish-style property bubble?

Spain’s banking sector has had three major overhauls in the four years since a building and property boom left banks with 184bn euros ($238bn) in toxic assets, including abandoned, repossessed housing complexes. Analysts question whether Spain is headed for an Irish-style property bust which resulted in a 68bn euro bailout from the International Monetary Fund and European Union.

On Friday, Spain will demand banks set aside another 35bn euros against loans to the ailing building sector – above and beyond the 54b euros they are already provisioning this year – raising the possibility that more public cash will be needed to rescue the country’s lenders.

Risky business

Bankia’s exposure to real estate, loans at risk of default and repossessed properties from bankrupt borrowers is 32bn euros. Despite that, the government stressed on Thursday it was business as usual.

“Bankia is a solvent entity that continues absolutely normal operations and its clients and depositors have no cause for concern,” the central bank said in a statement.

So far, there have been no signs of any deposit runs in Spanish banks but Spain’s economy is in its second recession since 2009, with 25 per cent unemployment resulting in rising loan defaults. The country’s banking woes threaten to undermine the euro currency zone if it requires an expensive public rescue.

Toxic assets

Spain also plans to detail a scheme to remove toxic assets from the banks’ books and sell them off – retaining the “good bank” assets and splitting off the non-performing “bad bank” of unsecured loans and mortgages.

The UK and Irish banking sectors faced similar crises in recent years. Northern Rock, the UK’s fifth largest mortgage lender in 2008, triggered the first run on a British bank in a century before it was nationalised, then split into “good” and “bad” banks and eventually sold to Sir Richard Branson’s Virgin in a £747m deal.

Ireland’s banking crisis triggered a financial breakdown requiring an EU and IMF bailout to resolve the crisis. Ireland’s government injected 63b euros into its banks and moved property-development loans to the National Management Agency, forcing Ireland to then ask for 68b euros in bailout funds.

Housing bust

Spain’s situation threatens to be even more volatile. Spain is Europe’s fifth-largest economy with a banking system six times larger than Ireland’s with a housing bubble twice the size of the US (in terms of peak prices compared to 1990 prices).

Spanish housing prices doubled over the last 10 years and lost 30 per cent in the last two years. US property also doubled in value during the decade and lost 35 per cent of its value. Irish property quadrupled then lost almost half of its value.