Bank bailout fund admits losses have reached 36 billion euros

Since it was set up in June 2009, Spain's bank bailout fund has cost Spanish taxpayers a total of 52 billion euros, more than 36 billion of which will never be recovered, according to the Bank of Spain's latest figures, released this week.

 The Orderly Bank Restructuring Fund (FROB), which has been headed by former director general of Economic Policy, Antonio Carrascosa, since the middle of 2012, was set up to rescue several failed savings banks, which were merged to create Bankia, Novagalicia, Catalunya Banc, Banco de Valencia, Caja España CEISS and BMN after they went belly up in the wake of the collapse of the property market.

The losses are the largest of any Spanish company, and come on top of the 10.5 billion euros the FROB lost in 2011 and the 314 million euros in 2010. This year looks likely to be equally as costly, with the fund set to sell off Catalunya Banc and Novagalicia, as well as having to pump more money into BMN, Caja3, Liberbank and Caja España.

The almost 37 billion euros lost by the FROB is larger than the amount that Miguel Martín, the president of the Spanish Banking Association (AEB), predicted in June: 33 billion euros.

In 2012, the FROB said its assets had already lost 25.2 billion, with Bankia making up 9.2 billion of that figure, followed by Catalunya Banc, which lost 6.7 billion; Banco de Valencia (5.5 billion); Novagalicia (3.1 billion); Caja España CEISS (525 million) and BMN (241 million).

In proportional terms, Catalunya Banc's losses are much bigger than Bankia's. Bankia is four times the size of Catalunya Banc. What's more, Bankia trades on the Madrid Stock Exchange, generating profits and its shares are set to continue rising in value. Catalunya Banc's value is estimated by the FROB at 2.4 billion euros.

The FROB is now preparing the sale of Novagalicia and Catalunya Banc with would-be buyers.

A FROB official at a press briefing in early July said the entity has until the end of next year to sell the two lenders, but their deteriorating financial health warrants faster action.

The official said both banks had seen outflows of deposits and clients over the past year that had stabilized in recent months.

An attempt earlier this year to sell Catalunya Banc failed. Potential bidders were put off by the idea of buying the troubled bank without protection from the state against possible future losses.

This time, bidders will be eligible for an asset protection scheme that would shield them from such losses.

The FROB will attempt to sell Novagalicia first, and hopes to complete the auction by October this year.

The Bank of Spain's bailout of the country's savings banks presented it with the problem of what to do with the entities' vast property assets. In response, in December of last year, the government authorized the creation of Sareb, a so-called bad bank, to help lenders facing capital shortages sell their toxic real estate assets as part of the commitments agreed to for the 41 billion-euro bailout from the European Union. Foreign investors, including Deutsche Bank and Barclays; Spanish lenders; and insurance companies agreed to purchase 55 percent of the capital in Sareb, allowing the government to keep the facility's debts off its books.

Among the Spanish investors persuaded by the government to participate in Sareb are major banks such as Santander, Bankinter, Unicaja, as well as insurance firm Mapfre, and utility giant Iberdrola. The remainder is owned by the state through the FROB. Sareb raised the 55 billion euros it needed to buy and maintain failed property developments and lend to property developers by issuing state-backed debt. Like the FROB, Sareb's exposure is public, but the 55 billion euros are not audited as public debt, nor is it reflected in the books of the savings banks with assets owned by Sareb. The debt is Sareb's but the Spanish taxpayer is the guarantor of that debt.

Sareb does not even manage its property portfolio, instead paying a commission to the lender if it is able to sell its toxic assets.

Spain has made progress in cleaning up its troubled banking sector since last year, when it was forced to ask the European Union for a 41.4 billion-euro loan to recapitalize several of its weakest lenders.

But the Bank of Spain has warned banks that they need to keep bolstering their capital base by curbing dividend payments, an indication that the central bank continues to worry about the health of the battered sector.