Spain’s cajas bank on reform

Topping off a couple of months of frenetic activity intended to guarantee the future of the Spanish cajas de ahorros were three events at the end of July. Their chronological order is important:

1) July 21 – the approval by Congress of the LORCA, the new legislation governing the cajas which includes mechanisms allowing these savings banks to sell equity shares in themselves.

2) July 23 – the announcement on the part of Banca Cívica (the fruit of a partial merger of Caja Navarra, CajaCanarias and Caja de Burgos) that they would be availing themselves of this opportunity by signing a letter of intent with the very large and high profile American investment fund, JC Flowers & Co. The latter would buy (subject to due process currently being conducted) 450 million euros in convertible bonds – with the apparent intention of exercising their rights and occupying a place on its board of directors.

3) July 24 – the publication of the results of the CEBS stress tests of European financial institutions. Banca Cívica failed with a shortfall of 408 million euros under the worst-case scenario.

To selectively comment on this on a point-by-point basis:

1) The legislation was published in the state bulletin on July 13 and brought to Congress on the day of its passage in the ‘take it or leave it’ form known as a Real Decreto. And it decimated in the process the many and varied journalistic predictions regarding the impossibility of reforming a system defended by so many entrenched political interests, by being approved by absolute parliamentary majority. It received 323 votes in favour, nine against and 16 abstentions.

2) The widely believed notions that the cajas would be universally loathe to permit ‘outsiders’ to interfere in the operation of their regional fiefdoms and the corollary that international investors would, in any event, turn their noses up at the opportunity, met the same fate.

3) The terms of the Flowers deal are that the bonds convert to equity automatically two years from the date of subscription and that they yield 7.75 percent annually. In certain senses, this is a worse deal than the one that would have been offered by the Bank of Spain bailout fund, the FROB. They also buy convertibles of comparable yield, but they convert after five years in the event that the recipient of the funds has not repaid the Bank of Spain in that period. One interpretation might be that Banca Cívica has chosen to by-pass all that nonsense and, at the cost of losing an as yet unspecified percentage of the company, to position itself with a clean balance sheet for the moment -probably not too far off in the case of both Spain and Europe- when demand for credit once again resumes.

One can expect that many of the cajas and the EU-approved “institutional protection schemes” under which these may have partially amalgamated with others of their ilk will follow suit in short order. Certain to be planning this as we speak is BBK, which was adjudicated the assets of the seized CajaSur (itself a household name worldwide, synonymous with the rumoured pending demise of the Spanish financial system, during the month of May of this year). The 500-odd million euros already contributed by the FROB plus the 100 million euros the stress tests found lacking are a burden best to be relieved of as soon as possible. The new Basque owners of CajaSur have already hinted they will be hiving off the social charity function as a pure foundation funding itself through the dividends from its stake in a new entity to be known as BBK Bank.

The fact that foreign investors did not abandon Spanish debt markets this year -despite the frightening amount of bad press the country received- should indicate that these issues will be more than well received in the current, more benign media environment. Also interesting is the distinct possibility of an initial public offering on the part of the IPS composed of Caja Madrid, Bancaja and several small regionals. With 4.5 billion euros to repay to the FROB and around 300 billion euros in assets, this might conceivably be the route taken. The company seems to have been baptized with name ‘Caja Jupiter’.

Not that we have any expectations that facts will ever make a dent in the bias created by the profligate use of cultural stereotypes, it is worth noting that with the passing of the <i/>ley de cajas</i> Spain is the only European country to have effected, to date, that fundamental and profound reform of the dysfunctional portions of its financial system accepted as urgently necessary by commentators of all stripes. If one accepts the generalized opinion that the American version of the same has failed to address the relevant issues, it becomes the only country in the world to do so.