The running of the bears

Spanish Banks Said to Be Set for Downgrade by Moody’s Today (Update 1)

Moody’s Investors Service is set to downgrade the credit ratings of Spanish banks later today, said two people with knowledge of the situation.

Fitch Calls For Capital Increase As Run On Spanish Banks Continues

Fitch ratings has called for a huge increase in capital reserves at the world’s biggest banks today as the markets reel from the run on Spain’s banks. The agency recommended banks across the world raise a total of $556 billion an increase of 23 percent over what the banks are currently holding.

Fitch made the recommendations on 29 of the world’s systemically important banks. That list includes Goldman Sachs Group, HSBC Holdings plc, Mizuho Financial Group Inc., Bank of America Corp., Societe General S.A., and JPMorgan Chase & Co. Banco Santander S.A., a Spanish banking giant, is among the list of the most important 29 banks. It is not at as much risk from the current run on deposits in the country but suffers from the aura of the crisis.

The increase in the amount of money banks have to hold and simply sit on meant the firms will not be able to earn money on those reserves and will reduce profitability. The other option is leaving the institutions open to failure. It is this tradeoff that will dominate the institutions for the next several years.

After, and in the midst of, such a unique and deep financial crisis it is probable that regulators will swing too far toward stability leaving less room for growth and innovation. It may be some years before a correct balance is restored to the sector but it seems inevitable that right now government interference is going to grow.

State rescue may be beginning of end for Spain's Bankia

Spain's government plans to clean up, downsize and sell Bankia within three years, but the strategy could be short-lived as the bank's capital gap may be larger than the 15 billion euros ($19.1 billion) so far identified, government and financial sources say.

"The bank faces two options," said a financial source with direct knowledge of the bank's situation. "First, to be wound down. Second, to be wound down. The question is how small it will be at the end."

Bankia, Spain's fourth-biggest lender with more than 10 percent of bank deposits, said its clients can be absolutely calm over the deposits they hold, while Spain's Economy Secretary said there had not been an exit of deposit funds.

The government which nationalized Bankia last week after months of uncertainty over its capacity to weather the financial storm.

Finally, the government is under intense public pressure to reduce the taxpayers' bill by selling the more than 5.4 billion euros worth of stakes the bank holds in major Spanish companies such as Iberdrola and Mapfre.

The Socialist opposition said last week it would back the Bankia takeover on condition public funds would be recovered at some point. Yet public anger at the banks is rising after seven other lenders had to be bailed out by the state at a time when education and health spending are being cut.

The lender's auditor Deloitte identified several gaps in Bankia's accounts and it is still not clear whether its rescue will cost the government more than the 15 billion euros it initially planned to inject.

A senior government source last week estimated the size of the state intervention at up to 10 billion euros.

That would come on top of the conversion of a 4.47 billion euros loan into shares, which will give the state 45 percent of Bankia, with an option to take another 3 percent, and 100 percent of its parent company Banco Financiero y de Ahorros (BFA).

Loaded with bad loans from a decade-long real estate boom, the bank needs to raise about 1.3 billion euros by June to comply with stringent European Banking Authority capital rules.

It also needs to find at least 6 billion euros by the end of the year to comply with two financial reforms presented by Spain's centre-right government in February and last week.

Greeks pull cash out of banks as confidence wanes

Greeks withdrew more than $900 million Monday and another $600 million Tuesday, according to the Greek Central Bank. While deposits have been steadily leaving banks since the start of the country's debt problems in 2009, this week's outpouring of cash reflects a new level of panic, analysts say.

Meanwhile, in Spain, the newspaper El Mundo said customers have withdrawn more than €1 billion ($1.27 billion) since the state took over Bankia, the country's fourth-largest lender, a week ago. Bankia insisted its depositors' money was safe, and the government denied there was a run on the bank.