An €80bn mega-inyección for Spanish banks? | FT Alphaville

An €80bn mega-inyección for Spanish banks?

Wa-hey. Anyone speak Spanish?

Just as the European Central Bank announced that Spanish bank borrowing resumed its upward trajectory last month (€70bn in December, up from €64.5bn in November) El Confidencial is reporting that Spain is preparing a massive capital injection of between €30 and €80bn to clean up the cajas, or local savings banks.

Via Google Translate:

The Prime Minister, José Luis Rodríguez Zapatero, is determined to tackle once and for all the cleaning up of the Spanish financial system, namely the savings banks. And for that, is prepared to make a capital megainyección public sector to be at least 30,000 million and could in extreme cases up to 80,000 [million], according to sources familiar with the situation.

Mega-inyección — we like.

This decision is due to both Zapatero and Elena Salgado believe that the Government has implemented all necessary measures to adjust and are bearing fruit, as shown in deficit reduction. And blame the punishment that our country suffers in the markets to mistrust in the financial sector, something that agrees with many experts.

Agrees with many experts. Erm, ok.

On the plus side though this is exactly the kind of thing that many commenters have been pushing for — write-down, recapitalise, rebuild. Though the order of the process is unclear (recapitalise, write-down, rebuild?) and the source of the money is too.

According to an RBS summary, the injection would come in the form of direct core capital (as opposed to preference shares under the current Fund for Orderly Bank Restructuring) which would give control of topped-up cajas to the government.

As RBS notes:

This part nationalisation of the banking system would be a major positive to the listed banks, especially if it triggers improved pricing in the wholesale markets and more rational loan and deposit pricing. €30bn to 80bn of direct equity would represent 3% to 8% additional debt / GDP for the country, but would ideally need to be prefunded rather than raised in one chunk from the market. If the second round of stress tests being planned were the trigger point, followed by massive recapitalisation, this could restore confidence in the Spanish banking market. As Banesto’s sobering 4Q10 results showed yesterday, the longer the government leaves it, the more expensive any clean up will be.

No kidding. Let’s hope the thrust of this turns out to be right.

Related links:
Spain is all about the banks – FT Alphaville
The Spanish (asset) Elimination – FT Alphaville
Bail out Portuguese and Spanish banks together? – FT Alphaville