Junk Bonds For Tourist Resort Modernisation?

Bankia is Spain's fourth largest bank. The name will mean a great deal to a great number of people, especially those who are customers in Mallorca of Bancaja. They will recall some of the slight inconveniences which occurred when Bancaja, along with six other banks, were rolled into the formation of Bankia. In its three years of existence Bankia has enjoyed anything but a smooth journey. The bank required a bailout last year, trading in its shares were suspended, it made a loss of 4.3 billion euros, its chairman Rodrigo Rato, at one time a leading figure in the Partido Popular and a former managing director of the IMF, stepped down, having been named the worst chief executive of 2012 by "Business Week" and then being charged with accounting irregularities, and its creditworthiness was reduced by Standard & Poor to junk bond status.

By March of this year, the bank's losses were put at 19.06 billion euros. Had the Spanish Government not partially nationalised Bankia and taken a 45% ownership, Bankia would almost certainly have collapsed. The toxic debt it had assumed through the merger of the different banks would have killed it.

The story of Spain's economic crisis and the role of badly managed banks (mainly the "cajas", the local savings banks) is well known. Bancaja and the Caja Madrid were the two largest banks and the two biggest offenders that went into the formation of Bankia. It was the mad, uncontrolled lending of these savings banks which helped to bring Spain to its knees. The consequence of the banking crisis was that credit all but dried up. Yet, it is beginning to be released again and, astonishingly enough, Bankia is one of the banks providing the credit.

The regional government in the Canary Islands has arrived at an agreement with Bankia whereby up to one hundred million euros will be made available as credit. The money is intended to modernise and diversify the islands' tourist sector and will be targeted principally at projects to improve tourist accommodation and areas and the "complementary offer" (more or less anything which isn't hotels); there will be an emphasis in innovation as well as on renovation. The credit isn't therefore being thrown straight at the Canaries government but will be used once Bankia has studied proposals and financing requirements.

In principle, the scheme has merits. The main drawback with it might be that the very name Bankia, with its lousy creditworthiness, is being associated with it. But then, as the Spanish Government has such an interest in the bank and as tourism is supposedly a driver of overall economic recovery, then the assets that the bank is sitting on might as well be put to some good effect. (It may be heavily in debt but it has vastly greater assets than debt.)

Revitalising the tourism sector cannot be something which the government funds or funds alone. The investment budgets for the regions, such as that for the Balearics, show how little money there is for general infrastructure. The money has to come from somewhere else, and typically it has come from the banks. But if the Balearics were to look at a similar arrangement to the one that the Canaries have concluded with Bankia, what could one hundred million euros achieve?

To put this into perspective, the transformation of Magalluf that is being driven by Meliá Hotels has a budget (that of Meliá and its partners) of 45 million euros. It is expected that the amount will increase to 150 million once other businesses and investors join in. The Bankia credit in the Canaries is for the whole of the Canaries. If it will cost 150 million to renew one resort, then 100 million, spread across various resorts, doesn't therefore necessarily get you a great deal.

The Balearic Government has set its stall out to modernise the "mature" resorts in Mallorca and the Balearics. But which resorts aren't mature? Magalluf might appear to be a special case deserving of special investment, but it isn't a special case. It has been made special for the wrong reasons and also for the fact that Meliá has such a strong presence in the resort. One can name any number of other resorts which need similar investment and similar projects.

The government's desire for modernisation has one big problem - its financing. The Spanish economy may be showing signs of life returning and the stock market may be performing well, but it is difficult to see the banks unlocking the coffers and chucking huge amounts of euros at the resorts for what are essentially construction projects. There is still too much baggage and there are too many weather eyes being cast on the Spanish banking sector for this to happen. But at some point the funding has to be released. And how much might this be? Don't forget some of the extraordinary sums that were spoken about for renewing Playa de Palma alone. 4,000 million up to 2020 was one.

Bank finance is going to be needed for Mallorca's resorts, but which bank's? Bankia's? The name would be enough to make you shudder.

Twenty Twenty: The bid that shouldn't be?

While the British honours system and Sports Personality of the Year have brought the London Olympics orgy to an end, it seems only appropriate to remind you what will happen on 7 January. Don't worry, it's not another awards ceremony, it is far duller than even that.

Submitting official bid books ranks pretty low on the excitement levels created by the Olympics, but this coming Monday is the day for the submission of the bid books for the 2020 Olympics. There will be three bids: Istanbul, Tokyo and Madrid.

Having managed to fail to secure the Games on the last two occasions, Madrid is hoping it will be third time lucky when Jacques Rogge picks the lucky number on 7 September in Buenos Aires. There's fortuitous you might think. Argentine capital, Spanish speaking, Lionel Messi and all that; Madrid must be a banker to get pulled out in September. It might have been before the Argentine president started going around nationalising Repsol's interests, but even this slight hiccup in fraternal  Hispanidad relations probably isn't sufficient to scupper Madrid's chances and make all parties look decidedly embarrassed when they pitch up in Buenos Aires for the grand un-opening of the Olympic envelope.

There is a far greater risk to Madrid's bid, and I suspect you all know what it is. Money. The absence thereof. If there is any money, whose is it going to be? Because it won't be Spain's. It will be numbered notes from the IMF or the ECB, and neither of them, one would imagine, would be overly keen to see great wads of cash being thrown at an Olympics, least of all by a country with a well-earned reputation for turning major projects into nice little earners for all manner of politicians and others. 

In the scheme of things, the 16 million euros that have apparently been spent thus far do not represent a huge amount, but of this spend, there have been one or two embarrassments, such as the report which, so it has been claimed, ran to a cost of nearly 700,000 euros but which proved to be worthless because one particular bank appeared as the main private-sector partner for the Olympics. Which bank do you think this might have been? If you reckon Bankia, then you have earned yourself a gold medal, one that isn't gold at all but is made out of worthless fool's gold. The mind boggles not only at the fact that someone was daft enough to even involve Bankia but also because of the associations the bank has (political involvement and a spot of alleged malfeasance).

In fact, Madrid's application document was pretty impressive. But then, producing a report detailing the application is one of the easier parts of the process. It was littered with the usual guff about what the Games would bring as well as all the stuff necessary to deal with accommodation, press, security and so on. However, other aspects of the preliminaries haven't been quite so impressive. The Games logo was unveiled to general bafflement and criticism. It looks like five flip-flops was one quip. One of the promotional videos (pura pasión) has been slated for the fact that it features flamenco, which isn't representative of Madrid, and people sitting around at cafés doing very little.

Under normal circumstances, I wouldn't quibble with Madrid's ambitions for the Games. But circumstances aren't normal. Were Madrid to be pulled out on 7 September, one can but only imagine the reaction of a shocked world that the capital of a country in such dire financial straits could be. It is no argument to suggest that the economy might be in better shape in seven years time, as commitments would have to start this year, were Madrid to win. And some of those commitments would come from the city of Madrid itself, already cash-strapped and in debt.

It wouldn't only be the infrastructure that would need funding, there would be the athletes as well. Spain would not have been as successful as it was at the 1992 Games had it not been for special funding. Its performances before Barcelona were poor and they have not come to close to matching those of 1992 since. The Spanish Olympic Committee just doesn't have the money. So where would this come from?

Monday marks only a further step along the way. The IOC evaluation commission will visit the candidate cities in March, report some time after, and the cities will brief IOC members in June. And on 7 September, the decision will be announced. Madrid? Well, part of me hopes that it succeeds. But it is a part that most certainly isn't my head.


QUIZ: "Libra, and my name is Charles. Now I like a woman that's quiet." It was of course The Floaters and it was truly awful. "Twenty Twenty". This was the 15th studio album by which American group?


Any comments to andrew@thealcudiaguide.com please.

The Man Who Dithered: The Bankia crisis

If the Spanish Government, rather than bailing out Bankia, were to give everyone in Spain an equal share of the sum it will end up pumping into the bank, everyone would be better off to the tune of 25 million euros.

Well, actually no, they wouldn't be. Toss large numbers around with lots of noughts, and chances are that there will be a miscalculation along the way. Everyone would end up with around 250 euros, which is quite a difference.

The 25 million thing has been doing the rounds as indignation grows as to the parlous state of Bankia and most of Spain's banking sector. To indignation, one can add genuine fear. It's finally happening.

The crisis at Bankia is not one of the past few days. It has been brewing. A solution to the problems with what had been a merger of various banks (i.e. Bankia) was to have been a further merger - of Bankia with La Caixa. This had been on the table since at least March, but nothing happened because the now ex-president of Bankia, Rodrigo Rato, wouldn't countenance a merger that would have resulted in power over what would have become Spain's main bank residing in Barcelona with La Caixa. In Catalonia.

There was a further reason why nothing happened. Rajoy dithered, as Rajoy always dithers. For once though, his indecisiveness might not have been a bad thing. Why it was thought that a merger with La Caixa was sensible, who knows. While many of the problems with the Spanish banking sector have been put down to the debts held by small savings banks, another problem is that the sheer size of some banks threatens to collapse the whole banking edifice in Spain.

Bankia's toxic debt would have been added to what La Caixa has. And what might this be? Good question, but it should be recalled that, as an example, it was La Caixa which was at the vanguard of aggressive mortgage selling that led to the bursting of the property bubble in the Andalusian town of Benalup, the town in Spain with the highest level of young-person unemployment.

Rajoy has at least ordered there to be independent audits of Spanish banks. It's something, but Rajoy's credibility, crumbling as rapidly as the Spanish banking system, has been severely undermined by the fact that he has gone back on his word that there wouldn't be bailouts for banks. Other promises broken, such as that on IVA, and Rajoy is heading towards his own crisis. He should have acted sooner, before Bankia's crisis deepened and continues to deepen. The only solution was a bailout.

Amidst this crisis, Rajoy insists that he's the man for the crisis as he is a rarity among European leaders in having a strong parliamentary majority. He hasn't taken at all kindly to suggestions as to what he should be doing from Italy's prime minister who doesn't have a majority as he wasn't actually elected.

Rajoy may be right, but what has he been doing with his majority? Monti may have been parachuted in as unelected leader, but he does at least give the impression of knowing what he's doing, unlike Rajoy. And while Rajoy may have a majority, support in the country is ebbing away. He does little to try and reassure his supporters as he is so rarely visible. It may be his style to work behind the scenes, but Spain is crying out for a leader who is credible and who can carry the country through what is now at the point of being its worst moment of the whole economic crisis. Increasingly, there is little alternative for Rajoy than to have to go cap in hand to the IMF or the European Financial Stability Facility.

There is probably also little alternative to the Spanish Government having to step in and support some other major Spanish banks, but would it have the wherewithal to be able to do so?

Politically, there is a worry that Rajoy, shielding himself behind his whistling-in-the-dark majority boast and having dismissed an offer from  the leader of PSOE, Alfredo Rubalcaba, to form a pact, has created a vacuum of economic and financial leadership. His own inaction, combined with confusion as to who within his cabinet is really in charge of economic affairs, unnerves everyone: the markets, Frau Merkel, anyone you care to mention.

Rato is the rat who left the sinking ship of Bankia. He's been blamed for a lot, but who was it who got him appointed at Caja Madrid before Bankia? The man with a majority, the man who dithered.


Any comments to andrew@thealcudiaguide.com please.