Hard-Power, Soft-Power and Soft Skills

Another interesting week in the evolution of the Banking System while we move deeper into the Financial Crisis. Last Friday, Spanish government nationalized Bankia, fourth Bank in the country. Again, another bailout and private debt converted in public debt.

The chain of events has been, more or less, as follows:

1) July 2011: Bankia performed and Initial Public Offering with a discount of up to 54% to its book value (around 12.000 Million Euro). Apparently concerns on the market on the Health of the Spanish Financial System push down the price of the IPO.

2) May 4th 2012: Bankia presents results for 2011 without the signature of the auditor.

3) May 8th, 2012: Mr. Rodrigo Rato, former Managing Director of the International Monetary Fund and President of Bankia presented his resignation.

4) May 9th, 2012: Spanish government nationalizes Bankia and injects 4.500 Million Euros for its recapitalization 9 months after being valuated in 12.000 Million Euro.

In my opinion, this is just part of the story.

Since the start of the Financial Crisis in 2008, the spread of Spanish government Bonds (also private of course) has grown dramatically and this week achieved 4.5 percentage points. Very close to the point in which other countries had to request a bailout from the IMF and other European countries.

Is it a good business buying Spanish debt? Obviously, it depends on the risk.

If I have the guarantee that I will get my money back, it’s a very good business.

On the other hand if that guarantee is public from the beginning, other investors will have interest in buying that debt and spread (and profit) will be lower.

In fact, from an investment perspective is better waiting to invest till Spanish economy is in recession and country’s government position is much weaker. At that time, investors will have the power of negotiating better conditions (including guarantees).

Even more; while Spanish situation worsens, speculators can make good profits taking short positions against country’s debt, pushing up the spread, and weakening the government negotiating position.

In the meantime, it’s very important that the rest of the world believes that this crisis is going to be short (2008), it’s starting to end (2009), economy it’s improving with some risks (2010), implement austerity programs for a stronger recovery (2011), etc.

Let me recommend you an interview to Mr. Paul Krugman comparing the Iceland and Irish approaches in front their banks insolvency.

I fully agree that Iceland situation is much better than Irish today because the countries approached to their Banking insolvency with very different strategies. But I don’t agree that this was “by mistake”.

A Financial Crisis can be a very good business (for some) and at the end it’s a balance of power; governments, banks, hedge funds with different interests and priorities.

“It’s not personal; it’s business (The Godfather-1972).”

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