Spain pressured as market weighs Bankia fallout
ReutersBankia Chairman Jose Ignacio Goirigolzarri.
MADRID (MarketWatch) --
Shares of Bankia (BKIA) , which had been suspended Friday ahead of that bailout news and took several minutes to begin trading on Monday, sank to an all-time low of €1.11 at one point, but ended off 13% to €1.36, according to FactSet Research.
On Friday, Bankia said it would need to ask the government for a bailout of €19 billion (around $24 billion), a figure that exceeded some estimates calling for a recapitalization of around €15 billion. The bank, formed of a merger of several savings banks, is a casualty of the collapse of Spain's housing market that triggered a recession and ignited another leg of the sovereign-debt crisis.
The IBEX 35 index (IBEX) fell 2.2% to 6,401.20. Losses for Spain chipped away at a rally for the rest of Europe, which had gained on a weekend poll that showed Greece's pro-austerity party taking a lead ahead of next month's elections. Europe stocks rise after Greek polls
The yield on Spain's 10-year government bond (10YR_ESP) shot up 16 basis points to 6.45%, according to FactSet Research, while the cost of buying protection against a Spanish default reportedly hit a record on Monday. A level of 7% triggered bailouts for both Ireland and Greece.
"Investors simply started looking at the figures," said Predrag Dukic, senior equity sales trader at CM Capital Markets. "€23.4 billion for a 'solvent' bank is a lot. On top of that, the rumors of an additional €30 to €35 billion for other, smaller banks such as Catalunya Caixa, [Novagalicia] and Banco de Valencia, are not helping the market sentiment either."
The figure of €23.4 billion refers to the €19 billion bailout, plus additional government equity that has already been injected into Bankia. It was just two weeks ago that Bankia plunged on rumors investors were pulling funds out of the lender, triggering bank and government officials to respond that the lender was solvent and its funding problems had been resolved.
In a televised news conference on Monday, Spanish Prime Minister Mariano Rajoy repeated that there would be no funds sought from Europe to rescue Spanish banks.
Analysts also noted speculation that of three more banks to be rescued -- as reported in the Spanish newspaper El Mundo on Monday -- Rajoy reportedly said the government would "act when needed." All three banks -- Banco de Valencia, Novagalicia and Catalunya Caixa -- have already been nationalized.
Weighing as well were downgrades to junk ratings for Bankia, Banco Popular SA (POP) and
Analysts took a red pen to their Bankia target price on Monday. Nomura slashed its target to €0.2 from €1.1 a share, saying recapitalization needs for Spain's listed and other nationalized banks could reach €50 billion to €60 billion. The government commissioned an independent audit of Spanish banks, due to be completed in mid-June.
"Grotesque, unbelievable, bizarre and unprecedented -- G.U.B.U. -- a familiar acronym used in Ireland, could be applied in this case," said the analysts in a note, in reference to the Irish bank bailouts that took place in 2010.
"We believe that the events at Bankia will reinforce the view that the upcoming external review should identify a significant recapitalization need for the Spanish banking system," they said.
Citing a dilutive recapitalization process, J.P. Morgan Cazenove analysts cut their price target to €0.31 from €1.70, while UBS analysts cut their rating to sell from neutral on Bankia, and price target to €0.5 from €2.75.
For financial markets, the larger question is what the bigger bailout means for Spain and the next leg of the crisis.
Markets are worried about where Spain will get the money to recapitalize its banks as the market ratches up the price for the government to borrow on the open market.
But at least one analyst in London was viewing the situation in a somewhat positive light on Monday. Edmund Shing, head of European Equity Strategy at Barclays Capital, said in emailed comments that it's "another positive development as far as Spain is concerned, as it's further proof that the government is prepared to deal realistically with the growing bad-loan problem in Spanish banks."
For bond markets, though, he said the news is less cheery, given that "it means more funding will be required in order to find the necessary money."
However, Shing said he would also argue that it "eases the path for the ECB, should they feel that further monetary easing is required to support the euro-zone financial system and economy."
Michael Symonds, credit analyst at Daiwa Capital Markets, said one worry that stems from Bankia is that its non-real estate assets are troubled. Bankia said it would need to "dramatically increase provisioning against non-real estate assets, including loans to companies and households," he pointed out in a note.
"While most long-held concerns over the Spanish banking sector have focused on exposures to troubled real-estate assets, this admission by Bankia that all is not well elsewhere in its loan portfolio will undoubtedly increase the focus on provision coverage of non-real estate assets at other Spanish banks," he said.
Nicolas Spiro, managing director at Spiro Sovereign Strategy, said the Spanish government is suffering from a "persistent lack of credibility in the markets," with the "botched bailout" of Bankia only worsening the situation.
"The Spanish crisis has reached a tipping point," he warned in a research note. "Investors have lost confidence in Spain."