Botched bailout rebounds on Bankia

May 18, 2012

By Fiona Maharg-Bravo

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Bank nationalisations are never pretty, but they are generally supposed to reassure savers. That’s why a report that depositors fled Bankia after the government last week took control of Spain’s fourth-largest lender is so troubling. The government has denied the report, and Bankia’s new chairman said depositors can be absolutely calm. Yet the latest share price plunge inflicts further pain on clients who participated in the lender’s IPO last summer.

To be fair, recent nationalisations of Spanish banks, such as Caja del Mediterraneo or Cajasur, have led to some deposits shifting to competitors. And even if the reports about Bankia losing 1 billion euros of deposits were correct, that’s still less than 0.6 percent of the bank’s deposit base. However, given the crisis in Greece and worries about contagion to the rest of the euro zone, it’s understandable that investors are particularly sensitive to any signs of capital flight in other countries.

Yet if some Bankia clients have turned their backs on the bank, this is more likely to be as a result of the bank’s plunging share price than a lack of confidence in Spain’s government to protect their deposits. Many retail customers who bought shares in Bankia’s initial public offering last July have lost 60 percent of their investment – a fall that was exacerbated by the government’s decision to take control of BFA, Bankia’s parent company. Despite various leaks, the state has yet to detail how it plans to recapitalise the bank.

The unhappiness seems to be concentrated on Bankia, which suggests that clients who do defect will move their money to other Spanish banks. The government and Bankia’s new management team could clear the uncertainty by spelling out their plans as soon as possible. But it’s hard to see any plan that doesn’t lead to large-scale dilution of existing shareholders, raising the prospect of a vicious cycle. The government may be afraid to lean on them too heavily for fear of damaging the franchise. But given the steep fall in the share price, it may be a bit late for that.

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