Bankia risk dragging Spain and EU into vortex

As reported by Bloomberg,

Bankia group risks dragging the rest of Spain into its vortex. 

As Spain’s third-biggest bank asks Prime Minister Mariano Rajoy’s government for 19 billion euros ($24 billion), international investors are tallying the potential cost for the rest of the industry and betting he won’t be able to foot the bill.... 

“The problem for Spain is that they can’t simply finance all this by issuing debt,” said Edward Thomas, who helps manage $6 billion as head of fixed-income investment at Quantum Global Wealth Management in Zug, Switzerland. “It’s a perfect storm for Spain, with more banks now being sucked in.” 

Spain needs to bail out lenders still reeling from the collapse of the real-estate boom while its own access to funding increasingly depends on domestic banks being kept afloat by the European Central Bank’s refinancing operations....

Given that Spain cannot foot the bill, it seems prudent to make the banks foot the bill for their recapitalization instead.

According to the IIF, after recognizing all the losses hidden on and off the bank balance sheets, the Spanish banks should be able to generate sufficient capital to rebuild their book capital in less than 4 years.

Spain is facing a credibility problem because of doubts generated by Bankia about “the size of that hole in the banking system,” said Andrew Bosomworth, a money manager at Pacific Investment Management Co., in a Bloomberg Television interview on May 29. 

“They know what to do. I think it’s the consequences of doing it -- how do the markets react if Spain applies for official external finance,” said Bosomworth, adding that experience of bailouts for Greece, Ireland and Portugal had been like a “kiss of death.”

Spain does know what to do.  It simply needs to require the banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  The markets can calculate the size of the hole in the financial system that the banks will have to refill with future retained earnings.

For the near term, it will undoubtedly be the 'kiss of death' for cash bonuses for bankers.

External auditors are due to publish a stress test on Spanish banks in June, followed by a more detailed report that will make clear how much additional capital banks may need.... 

Like the third party stress tests in Ireland and Greece, no one will believe the results.  In the absence of providing ultra transparency, there is no credibility to anything the government says or pays for.

Market participants have to discount the results because without ultra transparency so the market participants can confirm the results, it has to be assumed that there is something to hide.