The future of Spain?s ailing savings bank, the Caja de Ahorros Mediterráneo (CAM), is now clear. It has been sold to Banco Sabadell, and this raises its position in the Valencian regional government and wins some clout at a critical time for our banking sector.
The deal is comparable in complexity to when Popular incorporated Pastor, which was strategically positive but not without its risks if we bear in mind the CAM?s intrinsic weakness and the fact that its cleanup will require a lot of work.
The bill has risen to 5.249 billion euros, which includes the 2.8 billion that the Frob pumped into the CAM during its intervention. The money is the responsibility of the Deposit Guarantee Fund (FGD following the Spanish acronym), an instrument that covers 80% of the institution?s losses during the next 10 years for certain types of risky assets, which could shoot up to 21 billion euros.
The tangled web of Spain?s financial sector is unraveling, but once again it is painfully clear that Zapatero and Spain?s central bank was slow and clumsy when managing the sector. They wanted to avoid problems and ended up bloating costs. They put mere patches on moribund lenders that ultimately had to be revived in extremis or, as in the case of the CAM, sold through a deal process that were far more expensive for the Spanish people than the natural dying off of some bad banks would have been. Natural selection would have been a better course.
If at the end of the day, to retool and clean up the sector, it would have been less costly from an economic perspective to let the CAM fall, watch the sector adjust itself and only back lenders in a systematic way. In the way that it was done, however, the bailout has been crippled and costs have escalated.
