Tags: spain | central | bank

Spain's Central-Bank Chief Calls It Quits

Tuesday, 29 May 2012 03:29 PM

 

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Miguel Angel Fernandez Ordonez's early exit as Bank of Spain governor signals Madrid's desire to restore its credibility, days after the government was forced to stage the country's biggest ever bank rescue.

Ordonez met Prime Minister Mariano Rajoy on Tuesday to say he was leaving on June 10, giving Spain's leader a short time frame to announce a new head for the once-feted central bank.

The Bank of Spain has seen its reputation demolished as the mounting pile of toxic assets at Spanish banks threatens to push the country into a bailout that would jeopardise the future of the euro common currency.

In the latest humiliation for the central bank, Spain's government bowed last week to European pressure and hired outside auditors to examine the country's banks, acknowledging a lack of trust in home-grown assessments from the Bank of Spain.

Politicians and cabinet ministers from the ruling center-right People's Party, or PP, have piled blame on Ordonez, who was due to step down on July 12 at the end of his six-year term.

The political name-calling has undermined Spain's credibility at a time when its borrowing costs have soared to levels close to unsustainable because of risks at the banks.

"At a moment when Spain's credibility is in question, the very credibility of Spanish institutions should not be put into doubt by political parties," said Antonio Barroso, political analyst at consultancy Eurasia Group in London.

Ordonez sought to defend his legacy before parliament, but the ruling party has blocked his request. The PP criticized him for being too politically close to the Socialists and having experience in law and economy rather than in finance.

"At this point it's more about the technical expertise a candidate has than the political associations. The government needs someone who can deal with the ECB, talk to the press, and commands respect in Brussels," said Barroso at Eurasia Group.

The government says it rules out seeking European rescue money for the banks. But the recent 23.5 billion euro bailout for the biggest problem bank, Bankia, has revived concerns that the bill will get so high that Spain cannot handle it alone.

 

NAMES IN THE FRAME

The first priority for whoever takes over from Ordonez will be to restore international confidence in the Bank of Spain, which had historically been respected for risk controls.

On Friday the government named Luis Maria Linde, a former general director at the Bank of Spain, to the central bank's board, generating speculation that he could be Prime Minister Mariano Rajoy's candidate for the governorship.

However, under the bank's statutes he would have to retire in three years when he turns 70, and would not be able to complete a six-year term.

A high-level Spanish banker and a prominent foreign investment banker in Spain both said the strongest candidate is Jose Luis Gonzalez-Paramo, the respected Spanish board member at the European Central Bank, whose term ends shortly.

Other possible candidates are the Bank of Spain's current regulation director Jose Maria Roldan, though he has defended the bank's handling of the crisis; European Central Bank lawyer Antonio Sainz de Vicuna; and Banesto board member Belen Romana.

Jose ViƱals, current head of the International Monetary Fund's capital markets division who warned of Bankia's capital shortfalls, could be a strong candidate.

Yet the government may be reluctant to tap him given he was appointed as deputy governor at the central bank by the previous Socialist government.

 

BANK'S REPUTATION

Some bankers say Ordonez, who was not immediately available for comment on Tuesday, moved too slowly when the banks started getting into trouble.

"The Bank of Spain should have done better. It was difficult, but a harder line should have been taken. I think there was a problem in recognizing the seriousness, then in having the authority to convince the banks of action," said a senior banker at a leading bank.

The central bank's credibility has also been hit as it has dozens of inspectors at the country's largest banks, who seemingly failed to catch gaping holes in some of their books.

During a 10-year property boom fed by cheap loans, the banks loaned recklessly to property developers and gave out huge mortgages to low-earning immigrants.

When the property market crashed in 2007-2008 and the global financial crisis hit at around the same time, Spanish banks were left holding what is now estimated at 184 billion euros in bad loans to developers and repossessed property.

The independent audit, which has irked Spanish bankers, is meant to put to rest concerns that the rot is even deeper as the non-performing loans rate rises in a second recession in just a few years and unemployment remains high at 24.4 percent.

A government source said the audit was likely to be in line with a recent International Monetary Fund report, which showed that 70 percent of the banking system was in good health.

In the first two years of the crisis, Ordonez concentrated on eliminating the severe over-capacity in the banking sector by forcing mergers between many of the 45 regional savings banks.

But he struggled to reduce political influence on them.

The first effort has now been criticised since Bankia, the biggest merged entity, was not able to survive without aid.

Ordonez met with enormous political interference because local leaders in Spain's 17 autonomous regions fought to retain control of banks that had financed white elephant airports and fabulous cultural centers.

Also, in two waves of bank restructuring, Ordonez recapitalised weak banks using public money raised by a bank rescue fund, which took over several small savings banks.

Revelations of deep loan losses at the rescued lenders have only added to doubts about risks at Spain's larger banks.

Central bank officials defended their assessment of the bad loans in the system and called the market demands for heavier recognition of losses absurd.

It was not until this year, four years into the crisis, that the banks were forced to recognise potential future losses.

Through two decrees in February and May, new Economy Minister Luis de Guindos boosted the banks' provisions against bad loans and real estate assets by 84 b i llion euros.

Bankia, one of Spain's four biggest banks, was not able to come up with the funds. The government took over and new management has now said bad loans could go much higher than previously reported.

Last week the Institute of International Finance said the banks could need another 76 billion euros to cover losses.

© 2014 Thomson/Reuters. All rights reserved.

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