MADRID: Spain's bank rescue fund is to inject government aid immediately into Bankia after the troubled lender announced losses of 4.4 billion euros ($5.6 billion) in the first half of the year, the fund said Friday.
The fund for the orderly restructuring of banks, or FROB, said in a statement late Friday that it planned to inject capital into Bankia SA and its parent group Banco Financieroy de Ahorros SA with immediate effect after "the accounts declared significant losses."
The fund did not specify how much money it would inject, but said it was part of Bankia's restructuring and was an advance prior to Spain receiving up to 100 billion euros ($126.1 billion) in bank bailout funds from the other 16 countries that use the euro.
Bankia was nationalized in May and has called for 24 billion euros ($30.3 billion) in public aid.
At its Friday Cabinet meeting, Spain's government approved a new package of measures to create a "bad bank" to handle the country's toxic property investments and give the central bank more powers to shut down troubled lenders.
The reform is the fifth such package Spain has introduced since its financial difficulties began in 2008.
Economy Minister Luis de Guindos said the new "bad bank" would be up and running by the end of November and will be controlled by the central bank but would also involve the private sector.
He said the measure was chiefly aimed at unburdening banks of their bad investments so they can concentrate on managing people's savings and investments and get credit flowing again into the ailing economy. The bad bank would be able to bring some of the real estate assets — such as land which had been destined for construction and unsold houses — back onto the market.
The reform comes as Spain battles to convince investors it can handle its finances and avoid following Greece, Ireland, Portugal and Cyprus in requesting a government bailout
Spain's banks have an estimated 184 billion euros ($232 billion) in problematic real estate loans and investments following the collapse of the country's property market in 2008. Concerns about the sector pushed Spain in June to accept a €100 billion loan from the other euro zone countries to spend on rescuing banks.
De Guindos gave no indication as to how much or what type of toxic assets the new bank would take on or at what discount they would be bought from the troubled banks. The creation of the bad bank was among conditions of the euro zone's loan package.
The minister did say the new institution would have between 10 and 15 years to sell off those assets and the Bank of Spain would decide the value of the toxic assets.
"We're laying the basis to avoid a repetition of such a crisis in the future," the minister said at a news conference after a Cabinet meeting.
De Guindos said that given that the new entity would only be dealing with those banks that have been bailed out, it would be managing a figure considerably smaller than 184 billion euros, though he declined to say how much it would amount to. So far, eight banks have been taken over.
Analysts were not immediately impressed and said the reforms were short on detail.
"The reform is a step in the right direction but there is still a lot to do," said Carles Vergara, Professor of Financial Management at Barcelona's IESE Business School.
The markets responded with mixed results as the IBEX-35 rose 3.13 percent but Spain's benchmark 10-year bond rate also went up 0.28 to 6.83 percent at close of trading Friday.
Spain's "bad bank" will be the euro zone's second — the first was set up by Ireland in 2009.
However, Irelands's National Asset Management Agency or NAMA, has not been the success it was billed to be as soaring bank-rescue costs ruined the country's creditworthiness and forced it to negotiate an EU-IMF loan rescue in November 2010.
NAMA paid its banks just 30 billion euros ($38 billion) in government-backed bonds for assets originally valued at 74 billion euros, forcing the banks to record 44 billion euros in loan write-offs — which led to more rescues.
By 2011, NAMA reported a profit of 247 million euros as it cashed in some of the best of the property it seized from the UK and the US. But the state-owned agency plans to hold most Irish properties and development sites for up to a decade in hopes that the market will rebound first. It originally envisaged a 1 billion euros profit over its expected decade-long lifetime, but now says a break-even is more likely. Analysts expect losses.
De Guindos said Spain's new institution would be financed mostly by private investment with additional money from Spain's bank restructuring fund. He said only a small amount would come from the euro zone aid package.
De Guindos also announced the Bank of Spain would be given greater powers to intervene in earlier — and close down if necessary — banks with financial problems. The central bank would be able to intervene in banks that meet solvency requirements but are uncertain of fulfilling them in the future.
He said that in line with European banking rules, the government was raising the core capital requirements — the level of high-quality assets a lender has to hold to protect it from economic shocks — to 9 percent for all banks.
Results of a comprehensive audit of all Spanish banks are expected next month.
The reforms come as Spain got yet another dose of bad news Friday as the Bank of Spain reported a net capital outflow of 56.6 billion euros in June, topping an exit of 41.3 billion euros in May.
It said the outflow for the first six months of 2012 was nearly 220 billion euros, compared with an intake of 22 billion euros for the same period last year.
Spain's Bankia to receive immediate aid
