BANKING CRISIS

Former central bank governor feared euro exit over Bankia collapse

Miguel Ángel Fernández Ordóñez told judge overseeing probe that crisis “tarnished” the image of Spain’s financial sector

Miguel Ángel Fernández Ordóñez enters the High Court to testify before Judge Fernando Andreu. / ÁLVARO GARCÍA (EL PAÍS)

The former governor of the Bank of Spain feared that the collapse of savings bank conglomerate Bankia last year would force Spain out of the euro zone, according to testimony he gave in February to the judge overseeing the criminal fraud investigation which EL PAÍS has seen.

Miguel Ángel Fernández Ordóñez, who stepped down as governor of the central bank on May 30, 2012, before his term expired, reiterated his criticism of the Economy Ministry’s handling of the crisis, as well as the Spanish government’s decision to appoint Rodrigo Rato as Bankia chairman, questioning the ability of the former IMF managing director to run the troubled banking group.

“The crisis lasted a very long time. The collapse of Bankia has tarnished the image of Spain’s banks,” Fernández Ordóñez told Judge Fernando Andreu on February 14 at the High Court, pointing out that the collapse of Bankia sent Spain’s borrowing rate to unsustainable levels. “This is a scenario with enormous liquidity problems. This went on for a long time, until Mario Draghi [head of the European Central Bank] said that the EU would intervene to protect Spain’s banks and [German chancellor] Mrs Merkel said in Athens [last June] that nobody would be leaving the euro.”

Bankia, the country’s fourth-largest bank but its biggest real-estate lender, was swamped by unpaid property loans left over from a decade-long housing bubble. Considered too big to fail, Bankia was nationalized by the Spanish government in May of 2012. But the task proved too expensive, and Madrid was forced to request up to 100 billion euros in European aid.

The judicial probe names Rodrigo Rato and 32 other top executives. They are suspected of falsifying accounts, price-fixing and misleading investors in the lead-up to Bankia’s initial public offering last year. Most of the IPO shares were sold to Bankia customers, who have now lost more than 75 percent of their investment.

Rato has close ties to Spain’s ruling conservative Popular Party (PP), having served as economy minister from 1996 to 2004 under a previous government. The probe into his conduct could prove embarrassing for Prime Minister Mariano Rajoy’s party, which had previously rejected calls for a public investigation into alleged mismanagement at Bankia. At least two other former PP politicians are named in the investigation.

I don't know what happened to Rato that weekend; I had to read the newspapers to find out"

Judges will determine if formal charges should be filed. If convicted of the crimes alleged in the case, defendants could face up to six years in prison.

The former central bank governor blamed Economy Minister Luis de Guindos for much of the crisis, saying: “The sudden drop in share values and the crisis of confidence in Bankia happened after May 7,” when De Guindos forced Rato to step down by rejecting his plans to save the bank, said Fernández Ordóñez, adding that what were needed were confidence measures, “not making a lot of noise about the decisions being made. The lack of confidence led to capital flight and people pulling their money out of the bank. How things are done is just as important as what is done,” he added.

Fernández Ordóñez told the judge overseeing the investigation that the Economy Ministry and the Bank of Spain were working together on the rescue of the bank until May 4. But during that weekend he said the Economy Ministry stopped consulting the central bank. “That weekend, I don’t know what happened; like everybody else, I had to read the papers to find out. As regards Rato, the minister didn’t even bother to tell me what he intended to do that weekend.”

He continued: “The Bank of Spain didn’t want to get rid of Rato, preferring instead for him to remain as a non-executive chairman, with all the real power passing to a CEO, which would have attracted less attention. And that is what should have happened. The Bank of Spain didn’t want Rato to step down because we understood that this could have had a serious effect on the markets. We never asked for Rato to be replaced. What we asked for was for him to hand over power to somebody else, somebody new.”

When he stepped down on May 30, Fernández Ordóñez denounced a “campaign” against him as he sparred with the government over the costs of a bank rescue and the feasibility of budget targets.

He told the prime minister that his early departure would give his successor a chance to take better charge of the situation and open “a new chapter where important decisions must be taken.” The mounting tension between the nation’s top banking regulator and elected officials helped send borrowing costs to a euro-era record amid speculation a bailout was needed.

We asked for him to hand over power to somebody else, somebody new"

“There has been a campaign against the prestige of the Bank of Spain,” Fernández Ordóñez told reporters the day he announced his early retirement.

The governor, who was appointed by the previous Socialist Party government in 2006, faced criticism in the wake of the May 9 nationalization of Bankia group. Borrowing costs compared with Germany’s rose to their highest in the euro’s lifetime, prompting Rajoy to call on European authorities to support public debt and bolster liquidity.

The risk premium of 538 basis points compared with 10-year German bunds puts the government in an “extremely delicate” situation. Confidence, which deteriorated amid the “handling of the last banking crisis,” was Spain’s “biggest problem,” he told the Senate’s budget committee in May after he stepped down.

After its nationalization, Bankia also restated its accounts to a 2011 loss of almost three billion euros rather than the 309 million euro profit reported in February. Bankia was created in 2010, with the merger of seven regional savings banks. A separate investigation into the legality of that merger is also underway.

A significant part of Bankia’s problems have stemmed from Bancaja, as well as another bank in which it has a stake, Banco de Valencia. The two entities are based in the region of Valencia, which headed lending during the boom years to a construction sector that collapsed at the onset of the world financial crisis. Fernández Ordóñez told Judge Andreu that he had not pressured Rato and the head of Bancaja, José Luis Olivas, to push ahead with the merger. Olivas resigned as chairman of Bancaja on May 21.

“What happened was that we told Mr Olivas: ‘Look, we see it like this. You do what you want, but we see it like this.’ This was later converted into ‘the threat of intervention.’ The only thing the Bank of Spain does is inform; it does not approve mergers.”

He added: “Mr Olivas could have said that he didn’t want the merger to go ahead… He knew about the state of his bank.” Fernández Ordóñez also told the judge that the creation of Bankia “could have been a success,” blaming the recession of 2012.

“The fusion of Bankia, if not for the second recession, probably would have gone off perfectly. The hypothesis was that the Spanish economy was going to grow. The Bank of Spain’s research department said that the economy would grow by 1.5 percent in 2012. You have seen the news today? The economy fell by 1.8 percent. The IMF said that we were going to grow by 1.7 percent, and said that Spain was going to be the European country that grew the most. If that had happened, which most people believed, Bankia would not have had any problems. But there has been a huge recession, and what happens in the economy is passed on to the banking sector: unemployment means more debt, and as house prices fall, asset values fall, and what looks good in a business plan suddenly doesn’t look good any longer.”

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