How could Spain’s ‘secure’ banks descend into crisis?

It avoided toxic derivatives and helped to rescue Britain’s lenders. But the Spanish banking sector was so laden with property debt that the eurozone’s fourth largest economy is near collapse

Bienvenido a BankiaA team of International Monetary Fund (IMF) experts will fly to Madrid this week. They are meant to be there for the routine annual check-up the fund carries out on all members, but it looks increasingly likely that before they leave, they will have had to draw up plans for an emergency bailout of the eurozone’s fourth largest economy. This would catapult the debt crisis into a new and dangerous phase.

Until last week, it was the prospect of make-or-break Greek elections in a fortnight’s time that was giving Europe’s politicians sleepless nights, but Spain‘s bungled bailout of its fourth largest bank last weekend has forced its shaky finances to the top of the agenda.

Bankia, which has already been rescued once by the Spanish government, announced last weekend that it needed an alarming €19bn (£15bn) to patch up its finances, battered by the Spanish property crash. This was four times what had been estimated only a fortnight earlier.

With its bank bailout fund running dangerously low, the government initially proposed filling the hole with its own bonds, which Bankia could exchange with the European Central Bank (ECB) for cash. That smacked of desperation – and strayed too close to a direct bailout of the Spanish government to be acceptable to Germany and other eurozone governments, or to the ECB itself.

Without the ECB’s help, it is unclear where the cash will come from. Bankia’s plight, which is far more serious than the markets had suspected, raised questions about the rest of the country’s banking sector, which was once the bedrock of Spain’s economy.

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