Spanish Banks Agree to Layoffs and Other Cuts to Receive Rescue Funds in Return

The most significant cuts will be made by Bankia, the giant lender whose collapse and request for 19 billion euros, or $25 billion, in additional capital last May led the Spanish government to negotiate a banking rescue of up to 100 billion euros ($130 billion) a month later.

The money approved Wednesday is part of that negotiated amount and will come from the European Stability Mechanism, the rescue fund for the euro zone.

Joaquín Almunia, the European Union’s antitrust commissioner, said the approval of the restructuring plans of the four banks — Bankia, Novagalicia Banco, Catalunya Banc and Banco de Valencia — was “a milestone.”

Although the Spanish government can tap into more of the money to help other troubled banks stay afloat, the government has said it will not need the full amount in any case.

Presenting its restructuring plan on Wednesday, Bankia said it would lay off 6,000 employees, or 28 percent of its work force, and cut its branch network by 39 percent. The bank predicted it would return to profit next year and reach earnings of 1.5 billion euros ($1.9 billion) by 2015.

Still, the Spanish government has yet to draw a line under its banking crisis. The next step is expected in December with the creation of a so-called bad bank, which the government is trying to create by teaming up with private investors as equity holders. But the valuation of the bad bank’s assets has proved to be a thorny issue because of the effect such valuations could have on other real estate assets.

Even though the future of the four rescued banks is now clearer, “our banking sector is still in the middle of a road to nowhere,” said Juan Ignacio Sanz, a professor of banking at the Esade business school in Barcelona. He noted that banks had not resumed lending, “as nobody trusts that Spain’s economy will recover in the near future.”

He added, “Everybody is just waiting to see how the bad bank can operate, whether it will have any private investors and how it will affect the Spanish real estate market.”

The government wants to limit the assets in the bad bank to 90 billion euros ($116.6 billion). Bankia said Wednesday that it was hoping to transfer bad property loans valued at 24.6 billion euros ($31.9 billion), a discount of 27.9 percent compared with their current book value.

The International Monetary Fund also highlighted the difficulties in setting up the bad bank during a correction in the housing market. In a report issued Wednesday about Spain’s finance sector, the fund said that future transactions by the bad bank could “become reference prices for the market, given low turnover in the housing market.” After a prolonged recession, the I.M.F. predicted, Spain’s economy would grow 1 percent in 2014.

Caixabank, one of Spain’s largest institutions, is set to acquire Banco de Valencia, one of the four rescued banks, for a symbolic euro. Banco de Valencia is expected to receive 4.5 billion euros ($5.8 billion) of the European bailout money approved Wednesday.

Of the four rescued banks, Banco de Valencia was the only one for which Brussels reached the conclusion that “the bank’s viability could not be restored on a stand-alone basis.” The commission, which is the executive arm of the European Union, said the other three banks had the potential to rebound once their balance sheets were cleaned. By 2017, the balance sheet of each bank will be reduced by more than 60 percent compared to 2010, the commission forecast.

The conditions set by Europe are intended to ensure that the bailout does not distort competition in the banking sector. Mr. Almunia said the restructuring plans presented by the four banks were “very serious and very demanding.”

“I very much hope that the results that we expect to obtain from these decisions will allow the taxpayers — in this case the euro area countries’ taxpayers who are also taking risks, not only the Spanish taxpayers — to get an adequate return for these efforts,” he said.

Over all, Spain’s banking industry could need as much as 59.3 billion euros ($76.8 billion) in additional capital, according to an independent banking assessment published in September by Oliver Wyman, a consulting firm. Of the 14 banks assessed by Oliver Wyman at the government’s behest, half were not in need of any emergency funds, including the three leaders: Santander, BBVA and Caixabank.

Trading of shares in Banco de Valencia and Bankia was suspended Wednesday. Bankia’s collapse in May prompted lawsuits against the former management led by Rodrigo Rato, who had previously been managing director of the I.M.F. Disgruntled shareholders, who bought shares when Bankia floated them last year, assert that the bank and its auditors produced an inaccurate listing prospectus for what was at the time one of the few successful initial public offerings in Europe.

Bankia and other banks are also facing legal action from holders of preferred shares.

Raphael Minder reported from Madrid and James Kanter from Brussels.

Article source: http://www.nytimes.com/2012/11/29/business/global/european-commission-approves-bailout-of-four-spanish-banks.html?partner=rss&emc=rss