May has been a frustrating month for banking. It started early on the 7th with the official announcement from the government of Spain assuring that there were contingency plans in case that Bankia, the country’s fourth largest bank, would need recapitalization. It ended yesterday with the formal request for the money by José Ignacio Goirigolzarri, who succeeded Rodrigo Rato as president of Bankia after his resignation the 7th. Bankia’s executives hope to receive 19 billion euros from the Spanish government for restructuring its debts and refinancing their assets.
But the long and painful decline of the Spanish bank, although the latest, is not the only one. The 15th of May, 26 Italian banks were downgraded by Moody’s, including the five strongest entities; Unicredit, Intensa Sanpaolo, Banca Monte Dei Paschi, Banco Popolare, and Unione di Banche Italiane. The downgrade came after suspicions on the banks fluidity rose once the Italian government asked them to raise 15 billion euros more for their recapitalization. The fact that Italian banks had already received 116 billion euros in December and 139 billion more in February from the European Central Bank doesn’t help to restore confidence in an economy hit severely by austerity measures, recession, and an apparent inability to refund their banking system regardless of how much money the European Bank invest on it.
The political defeat of austerity has also set the tone for new borrowing in a national level. The electoral victories of Hollande in France and the radical rejection of German fiskalpakt in Greece were followed soon by the central banks’ decision to augment their money base three-fold, as a bold measure to face the increasing doubts on Europe’s financial future. The growing power of the European periphery when it comes to financial credibility is being damaged by systematic downgrades and political uncertainty, not only in Greece, a key country in the EU at the moment, but also with the redefinition of a new fiscal pact between Merkel and Hollande.
The process of recapitalization is not a uniquely European phenomenon, and it has been present since the start of the crisis. But it is getting more acute. China said the 12th of May that the government will cut the reserve requisites by 0.5 percent after making public economic growth expectations that predict a 7.5 percent increase for the whole year of 2012, far behind last year’s 9.2 and 10.4 in 2010. Lowering the compulsory bank reserves is another strategy to pursue the so desired fluidity of money, expected both in Europe and China.
Bearing this information in mind, it seems like the banking sector is preparing itself for harder times, but we have to understand that all this measures are either imposed or promoted by governments as a response to punctual crises. The loans granted to Bankia and the rescue plan were structured by the Spanish executive after the bank lost 58 percent of its capital in the stock market since it came to the markets in July 2011. The same can be said in both the Italian and Chinese cases. Italian banks not only face pressure from American rating agencies, it is also their government who is urging them to follow the recapitalization agenda.
The reason behind is the same that rose after the austerity policies were defeated in the polls in Greece and France: governments want to increase growth without increasing the cost of borrowing by securing the capital available in their banks and by lowering thus interest rates. This is not an exception, but a new wave of refunding policies intended to answer the growing pressures on a divided currency as is the euro.
Juan José Rivas Moreno