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The kingdom of Spain bleeds its population to save its private banks

The kingdom of Spain bleeds its population to save its private banks


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By Jérome Duval

The announcement of the Rajoy government on June 9, 2012 of a rescue plan, - which it had previously rejected -, of up to 100,000 million euros (around 10% of GDP), aimed at cleaning up the entire Spanish financial sector , put international financial institutions and markets under stress. During that time, citizens suffer new antisocial measures, plunging them into an increasingly extreme precariousness.


Bankia, emblematic case of the Spanish banking crisis

The rescue of BFA-Bankia, via nationalization of its losses and toxic assets, followed by a historical demand for public aid of 19,000 million euros (23,500 million in total with aid already received), has precipitated Spain into political hysteria, whose pulse is beaten by the financial stress of the deadlines set by creditors. The announcement of the Rajoy government on June 9, 2012 of a rescue plan, - which it had previously rejected -, of up to 100,000 million euros (around 10% of GDP), aimed at cleaning up the entire Spanish financial sector , put international financial institutions and markets under stress. During that time, citizens suffer new antisocial measures, plunging them into an increasingly extreme precariousness.

At the heart of this crisis is BFA-Bankia, the fourth largest bank in the country in terms of market capitalization, with 10 million clients and around 380,000 shareholders. Bankia represents 10% of the Spanish financial system. Without a doubt, it is the bank most exposed to high-risk real estate loans, which is why it is considered a “systemic” bank: its bankruptcy could drag down the banking sector as a whole and, subsequently, the entire economy of the country. Bankia, or more exactly BFA-Bankia, was born at the end of 2010 and is the fruit of an intelligent conglomerate that allows isolating the problematic real estate assets of the seven savings banks regrouped within their parent BFA (Banco Financiero y de Ahorros) . This, aided by the State, operates as the "bad bank" of Bankia. The State supports the mountain of doubtful real estate assets gathered in BFA while its Bankia subsidiary, freed from such a heavy burden, tries to attract capital from small investors for its IPO. The objective is clear: transfer the risks resulting from the housing bubble, from the private sector to the public. Taxpayers, damaged customers and small shareholders at risk due to the irresponsible recommendations of the bank, will be directly affected; but even more widely, the Spanish population as a whole will once again suffer the burden of a private debt that has become public. It is again an excellent opportunity for bankers - responsible for high-risk investments that have led to astronomical losses - to save their indecent bets.

The successive governments of Zapatero (PSOE, liberal left) and Rajoy (PP, liberal right created by the Francoist Manuel Fraga), choose to help them by ridding them of the unsustainable risk derived from the real estate bubble and injecting money charged directly to the State budget, in detriment to vital sectors such as social protection, education, health or even fire fighting. Given that the State goes into debt to clean up the banking system, budget cuts that affect the welfare state are decreed unavoidable in order to reduce the deficit caused. This is the trap we want to denounce. BFA-Bankia, which has also been criticized for being among its executives | 1 | With former active members of the Popular Party, especially from the old Caja Madrid, - currently part of the BFA-, it represents a school case that mixes politicians and bankers at the service of finance.

BFA, Bankia's "bad bank"

As a result of the bursting of the housing bubble, the restructuring of the banking sector has caused the number of savings banks to go from 45 to a fortnight since the beginning of 2011. Consequently, in addition to branch closures and subsequent layoffs, capital has been concentrated in the hands of huge entities considered "Too big to fail" ( "Too big to fall"). Only two small savings banks escape the merger: Caixa Ontinyent and Caixa Pollença.

BFA (Banco Financiero y de Ahorros) was born on December 3, 2010 and began operating in January 2011. This new entity is the result of the merger of seven regional savings banks, undermined by a real estate bubble that has not yet been revealed the depth of the crisis: these are Caja Madrid and Bancaja, which hold the majority of the shareholders (52.06% and 37.70% respectively), which include Caja de Canarias (2.45%), Caja de Ávila (2.33%), Caixa Laietana (2.11%), Caja Segovia (2.01%) and Caja Rioja (1.34%). Beyond the Bank of Spain and the senior officials of Bankia, Zapatero's socio-liberal government has the responsibility of having authorized and encouraged such a merger. At the end of 2010, the FROB ( Fund for Orderly Bank Restructuring) | 2 |, the public sector aid fund, grants a loan of 4,465 million euros to BFA, Bankia's parent company, thus opening the way to the nationalization of the banking system. The objective of this operation was to clean up the accounts of the savings banks regrouped within the new entity. But this will prove insufficient.

We should also point out that BFA has stakes in Airport Concessions (7.86%), Deoleo (9.63%), Desarrollos de Palma (10.38%), Ejido Desarrollos Urbanos (7.34%) Grupo Inmobiliario Ferrocarril (10.17 %), Haciendas Marqués de la Concordia (8.47%), IAG (12%) Mercavalor, Sociedad de Valores y Bolsa (10.48%), NH Hoteles (9.22%), Numzaan (7.41%) , Mapfre (15%) and Iberdrola (5.27%). | 3 |


The exposure of creditors, mainly in the Spanish banking sector, accumulated at the end of 2011, according to statements by the Bank of Spain, between 176,000 and 184,000 million euros of problematic real estate assets. BFA, which, judging by its own accounts, is the most exposed to the real estate sector, at 37,500 million euros at the end of 2011, of which 31,798 million are problematic real estate assets (loans at risk of not being repaid), closes its first year of exercise with the largest losses in the history of Spanish banking. After having declared profits of 309 million euros in 2011 under the management of Rodrigo Rato, BFA announces a negative balance of 439 million, before finally recognizing - already after the departure of the former IMF leader - having accumulated 3,318 million euros in losses during 2011. If we add the losses caused by the depreciation of securities on the stock market, this sum would exceed 7,263 million euros. | 4 | The shock is all the more important since Zapatero and the Bank of Spain had strongly encouraged numerous IBEX 35 companies to buy their shares, with an investment of close to 3,000 million euros. | 5 |

This disastrous management of the bank did not prevent its CEO, Rodrigo Rato, from pocketing 2.34 million euros in fixed salary, nor Francisco Verdú, its CEO, from being paid 1.57 million in 2011. | 6 | (For having arrived during the year, he does not receive all of his annual remuneration of 2.26 million). Jose Luis Olivas, Vice Chairman of Bankia before resigning and still today Chairman of Bancaja, received 1.62 million euros in 2011. Finally, José Manuel Fernández Noriella, who replaced Olivas, has received 725,000 euros that same year 2011. This they are nothing more than fixed remunerations, which therefore do not include possible variable remunerations or those received as administrators of other companies.

Therefore, colossal sums were distributed before the bank requested public funds to float. In February 2012, a new law | 7 | limits to 600,000 euros of fixed remuneration the salaries of the directors of entities that have received money from the State. An insufficient and very late measure if we consider that the members of the board of directors of BFA, which received 4,465 million public aid through the FROB, distributed between January and November 2011, more than 9 million euros. | 8 | It is necessary to privatize the losses urgently, making those responsible who took so much advantage pay and not socialize them as the government does; It is more than time to put the banking sector under public control without the State having to bear the cost of the operation. It is the large shareholders who must bear the expenses and the directors must be prosecuted by justice in order to determine their responsibilities in the debacle.

Rodrigo Rato provides himself with a golden parachute before the Bankia crash

Bankia goes public on July 20, 2011. Rodrigo Rato, former economy minister and economic vice president of Jose María Aznar when the real estate bubble was growing, former director of the IMF and president of Bankia, proudly rings the bell for the opening of the Stock Market that day. The share is worth 3.75 euros and everything is going well in the world of deregulated finance that has a new product to bet on. On May 7, 2012, the share was changed to 2.37 euros (that is, a 37% collapse in ten months) and, as at the IMF in 2007, Rodrigo Rato resigned before the end of his term. He will be replaced two days later (on May 9) by José Ignacio Goirigolzarri with the advice of Rato himself, who designates him as "The best person at the moment to lead this project". Arturo Fernández, vice-president of the CEOE (Spanish Confederation of Business Organizations) and director of Bankia, stated in turn that "Rato's work has been exemplary". |9|

The Goirigolzarri scandal

Before retaking control of Bankia, José Ignacio Goirigolzarri has held, among others, the position of Vice Chairman of Repsol (April 2002-April 2003) and Telefónica (April 2000-April 2003), occupying a seat on the board of directors until 2003, continuing his long 30-year career at the heart of the second Spanish bank, BBVA, where he received around 4.6 million euros a year (fixed salary and variable remuneration). He has also been a director of BBVA-Bancomer (Mexico), Citi Bank (China) and CIFH (Hong Kong) during this period. In September 2009, in the midst of the international debate on the limitation of wages and bonus, leaves his post at BBVA with an early retirement of close to 3 million euros gross per year. While the crisis was spreading violently across Europe, it suddenly charged 68.7 million euros! | 10 | Despite the scandal caused, nothing changes within the banking system: two years later, in 2011, Francisco González, president of BBVA and Ángel Cano, CEO, receive a total remuneration of 4.9 million euros and 3.6 million million respectively. That year, the management committee received a total of 9.35 million euros of fixed remuneration and 14.2 million of variable remuneration. | 11 |

Bad bank nationalization

As soon as he arrived in Bankia, Goirigolzarri proposed that the state take control of BFA. The government responds quickly that it will provide the necessary capital for the remediation and thus control 100% of BFA. The State becomes the majority shareholder of this entity, which then held more than 45% of participation in Bankia and from the same moment it enters the capital of the companies of which BFA is also a shareholder.

Thus, a few days after Rodrigo resigned, the FROB decided to transform the 4.4 billion euros injected at the end of 2010 in the form of convertible preference shares to 5 years in simple actions. Indeed, as Mikel Barba explains: "These shares are subject to interest payments and must be repurchased by the entity in a period of five years. In the event that the entity cannot return the money contributed in five years, the shares become capital with which the State becomes the owner of a part - or all - of the company. (…) The FROB recognizes that it will not recover the money it placed in BFA's preferred shares within five years, so it decides to convert them into capital. It goes from being a creditor of the company to being the owner. " |12|

On May 25, after the rating agency Standard & Poor's announced the downgrade of Bankia's note and four other Spanish banks to speculative investment status, the listing of Bankia's securities was suspended while its board of directors try to determine the amount of new aid required. BFA-Bankia, which had already received 4,400 million euros in public money from the FROB, finally requests an additional 19,000 million euros from the State. This marks, in fact, the largest rescue operation in the financial sector in Spanish history. The nationalization of banks on the verge of bankruptcy thus joins the long list of those already carried out since the beginning of the crisis, both in Spain (Catalunya Caixa, NovaGalicia Caixa, Banco de Valencia, not counting the other entities that had received money injections, such as Caja Castilla la Mancha, Cajasur, or CAM), as well as abroad. By way of example, the Franco-Belgian-Luxembourg bank Dexia has been rescued from bankruptcy on two occasions and the operation has cost taxpayers 18,000 million euros. | 13 |

Mariano Rajoy has assured that the rescue of Bankia would not have any impact on the country's public deficit, which had promised to reduce from 8.9% to 5.3% of GDP this year 2012. | 14 | However, nothing is less certain than this and during the first five months of 2012 (from January to May), the state deficit has already reached 3.4%, with an increase of 30.6% in relation to the same period from the previous year.

During that time, the collapse of Bankia's securities continued. On June 20, 2012, the price reached 80 euro cents, that is, a loss of 80% since its IPO. Likewise, the announcement by the eurogroup on June 9, 2012 of an injection that could reach 100,000 million euros, - well above the 37,000 million estimated necessary by the IMF | 15 | and of the 62,000 million of the consultants Oliver Wyman and Roland Berger-, it has not benefited Bankia, which is the only financial entity of the Ibex 35 that has registered a fall in its market capitalization from this date until June 30. The titles have lost 9.80% during this short period, while the other banks registered gains after the euphoria caused by the announcement of the rescue. | 16 | On July 17, shares fell to 0.59 euros, their minimum, before rising in August due to the proximity of an imminent injection of European capital, of which Bankia would be the first beneficiary. The IPO is a fiasco supported by small investors who see their deposits reduced to nothing, while large investors, well informed, flee the debacle.

In a text written in 2010 | 17 |, David Hall stated that the financial and economic crisis is the result of unsustainable loans and the creation of complex forms of debt by banks. Since the September 2008 bankruptcy of Lehman Brothers, the United States and other governments have decided, after decades of privatization, to save the banks by nationalizing them or by pumping in capital to regain their solvency. Make no mistake, the State is generally left out of management, which remains in the hands of bankers. This is not a weakness of capitalism, but rather a maneuver to reinforce it by socializing the losses, before re-privatizing the establishment, viable again thanks to the reorganization. The IMF describes this as "An unprecedented transfer of risk from the private to the public sector." |18|

Translation: Mireya Royo.

Notes

| 1 | See the detailed list: http://www.diarioelaguijon.com/…

| 2 | The constitution of the FROB, approved by Parliament on June 8, 2009 and developed by Royal Decree of June 26 of the same year (RD 9/2009), tries to help banks weakened by their exposure to the real estate sector and in crisis since the bubble burst in 2008. The public fund to help the financial sector (FROB) now controls NovaGalicia, CatlunyaCaixa, Banco de Valencia and Bankia. Its capital of 9,000 million euros, coming from the State budget, is exhausted at the end of 2011, and hence the interest aroused by the European bailout in terms of the extent of the necessary sums

| 3 | http://www.elmundo.es/elmundo/2012/05/09/economia/1336577121.html

| 4 | http://www.elconfidencial.com/… and Reuters, May 29, 2012, http://fr.reuters.com/article/businessNews/idFRPAE84S02120120529

|5| "Bankia and the fiasco of politics", The country, July 1, 2012.

|6| The country, May 7, 2012, http://economia.elpais.com/economia/2012/05/07/actualidad/1336412114_356055.html

|7| Royal Decree-Law 2/2012, of February 3, on sanitation of the financial sector. Title IV, http://www.boe.es/boe/dias/2012/02/04/pdfs/BOE-A-2012-1674.pdf

| 8 | http://www.elconfidencial.com/…

|9| "Rodrigo Rato's work has been exemplary" in "Bankia's situation is not so desperate", ABC Point Radio, 05/08/2012, http://www.abc.es/20120507/economia/abci-bankia-situacion-desesperada-201205072233.html

|10| "Goirigolzarri, the executive of the millionaire pension at BBVA", The country, May 7, 2012, http://economia.elpais.com/economia/…; http://elpais.com/diario/…

| 11 | http://economia.elpais.com/economia/2012/02/10/actualidad/1328863666_274271.html

| 12 | See Mikel Barba, The Bankia case or the five maneuvers of a great scam, http://www.rebelion.org/noticia.php?id=149845

| 13 | The CADTM Belgium and ATTAC filed on December 23, 2011 an appeal before the Belgian Council of State to annul the Royal Decree of October 18, 2011 that grants a State guarantee of 54,450 million euros to certain Dexia loans that is the equivalent to 15% of GDP (Gross Domestic Product) of Belgium. See http://cadtm.org/Resume-du-recours-Dexia-intente

| 14 | This before Brussels, seeing the objective unattainable, agreed to a year delay, bringing the deficit objective below 3% to 2014 instead of 2013. Reuters, July 7, 2012.

|15| "The IMF appeals to a credible filet de sécurité pour les banques espagnoles" Les Echos June 9, 2012-

|16| "All financial entities listed on the Ibex 35, except Bankia, have recorded significant gains on the stock market since last June 9 the Eurogroup provided Spain with up to 100,000 million to clean up the sector. (…) Bankia has been the only entity listed on the Ibex 35 that has recorded losses in this period, falling by 9.80%. " Bankia, unable to join the euphoria of the financial rescue, June 30, 2012, http://www.intereconomia.com/…

|17| Why we need public spending, David Hall, PSIRU, University of Greenwich, p.11, October 2010.

| 18 | Ibidem and IMF, Global Financial Stability Reportt, July 2009, http://www.imf.org/external/pubs/ft…


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