Starring A. Spanish Banker as the Cookie Monster, bank assets as cookies, and Mario Draghi as the Count:
Both: Eat! Count! Eat! Count! Eat! Count!
Count: Vait… why don’t we… cooperate?
Cookie Monster: You mean?…
Count: Yes. I vill count the cookies. And you. Vill eat them!
Cookie Monster: Count?
Count: Yes?
Cookie Monster: COUNT.
___________________
Other way round maybe with Bankia, now the biggest bank bailout in Spain’s history.
The ECB’s cooperation would have to be solicited for this…
The plan, viewed as highly unorthodox by analysts, involves Madrid issuing Spanish government guaranteed debt to Bankia in return for equity, with the bank then able to deposit the bonds with European Central Bank as collateral for cash…
Spain has not yet made any approach to the ECB on how its capital-raising plan would work, according to an official familiar with the situation.
It *is* highly unorthodox. We’ve been scratching our heads over this one. But as far as we can make out, it’s strangely reminiscent of the Irish bank bailouts.
First, just to recap — the Bankia group as a whole needs €19bn. Spain’s bank rescue fund, FROB, usually issues debt to markets to cover equity injections, though it recently gained the authorisation to issue bonds directly to banks.
Spain seems to have conceded here that market premium would be too high for it to sell bonds needed to cover Bankia. (So does that mean the alternative to using the ECB would be Spain seeking a bailout?) In itself, that is pretty striking.
The other striking thing is the similarity to Ireland.
1) Precedent. Here’s the first comparison that came to mind for us — the EFSF bonds being given to Greek banks to recapitalise them. Technically, Greece’s bank rescue fund receives bonds from the EFSF and hands them on to banks in return for shares.
You could also point to the promissory notes Ireland used on Anglo Irish in 2010, shortly before its own bailout. The notes were government-guaranteed in the way the Bankia instruments might be (versus coming from the EFSF). In either case the recipient banks get something to shove on the asset side of their balance sheet, useable as central bank collateral.
The catch is that Anglo could only pledge the promissory notes as collateral for riskier, expensive Emergency Liquidity Assistance from the national central bank, not the ECB normal liquidity ops. Anglo was a black hole collapsing in on itself.
So the question is, what is Bankia to the ECB?
2) How Bankia funds itself. In addition to the Irish precedent… the ECB recap plan also interests us given Bankia’s existing, secured, funding model. Fitch recently on BFA, Bankia’s group parent:
Other investments include a repo-funded Spanish government securities portfolio, which is mostly used for carry trade purposes…
For which read the LTRO. Obviously there will be no more LTROs (for now) so Bankia would have to roll over funding fairly often if using government debt to recapitalise itself, we guess.
Bankia needs that €19bn notably as an equity crash barrier for its real estate exposure. Clearly however, this is also a bank with a small income problem and a blown-up loans business. El Pais reported on Monday that BFA is set to post the biggest loss in Spanish banking history when it makes final results for 2011. BFA-Bankia’s president said during the weekend that the bank is getting an investment and not a loan from the government, and the exit point for that investment will be Bankia making a profit over time.
Really. Well carry on, Bankia.
Related links:
Bankia’s (new) president, putting foot in it – AP via NY Times
Accounting treatment of promissory notes - Irish government (2010)
