During the past two years we have listened time and time again to news about banking reform in Spain. If reforms had been completed by now, the world would not be watching Spain so closely, foreign investors would not have fled the Spanish stock market and the Deposit Guarantee Fund would not have been nearly-drained in fulfilling its main purpose -- guaranteeing deposits held by clients at major Spanish banks.
Bankia carried yesterday's stock market rebound, which signals the market's positive reaction to a decision that the Spanish government should have made months ago: creating a bad bank. This bad bank will split off toxic real estate assets in order to clean up the major bank balance sheets. Reforms are still incomplete, and as a result are causing frustration and uncertainty.
Struggling governments that don't risk calling things as they are and don't spend taxpayer dollars effectively are not able to enact change in time. These failures in Spain could translate into an even higher cost: putting the Spanish economy on the brink of collapse.
Spain's trouble took another victim yesterday as Bankia CEO Rodrigo Rata was let go from Bankia. Rata was the first to propose a bad bank, but those by his side when he was at Bankia's helm didn't pay him much attention. Now someone else is achieving what Rato asked for initially. Luckily, this person is José Ignacio Goirigolzarri, a professional and creditable banker. Five months ago he was the person who could have allowed the ECB "open bar" to take place under better conditions and quelled hesitation in the markets, but his courage to do so fell flat.
