Bowing to the bankers, Spain bails out Bankia

Despite overwhelming evidence that governments injecting funds into an insolvent banking institution does not

• restore confidence in the banking system, 
• restore confidence in the bank, 
• promote lending to the real economy, or 
• lead to the bank recognizing its losses and cleaning-up its balance sheet, 

the Spanish government decided to bailout Bankia.

Despite overwhelming evidence that governments injecting funds into an insolvent banking institution does

• deprive the real economy of the use of these same government funds to promote economic growth, 
• increase runs on the banks as depositors realize that the government has less ability to stand behind it deposit guarantee, 
• increase the government's cost of funds as investors realize that the government is committing itself to finance the black hole of losses throughout its banking system, and 
• continue the downward spiral in the real economy caused by the excess debt in the financial system, 

the Spanish government decided to bailout Bankia.

According to an article in the Telegraph,

Spain's finance minister said the government would inject “at least €9bn” (£7.2bn) into ailing lender Bankia while insisting it was an isolated problem which would not spread to the rest of the country’s banking system. 

Luis de Guindos told the Spanish parliament that the government would do whatever was needed to rescue Bankia, while stressing that the situation “shouldn’t be extrapolated to the nation’s entire banking system”. 

In what amounted to an attempt to bolster confidence and prevent a run on Spanish banks... 

Mr de Guindos said a total restructuring of the bank would occur after a thorough assessment and that the government would seek to sell Bankia once it has been cleaned up, as part of a strategy to restore investor confidence in the country’s banking sector.  

The minister sought to ease concerns as fears about the health of the Spanish banking system have mounted in recent weeks because of their exposure to the collapsed property market. 

Spanish banks have an estimated €184bn of what the Bank of Spain describes “problematic” real estate-linked assets.... 

“The question is now about the long-term solvency of parts of Spain’s banking system, especially what is going to happen with mortgage loan default. This concern is not being addressed,” said Martin van Vliet, senior economist at ING.

The fact that mortgage loans are not being addressed undermines what limited credibility the Spanish government has when it comes to dealing with the banking system.

It is clear that the government does not know what is going on and is doing what its advisors, who naturally enough come from the banking industry, tell it to do.