In Spain, investors watch for run on banks

MADRID — Spaniards laze at sidewalk cafes on a street dotted with banks. The biggest bank bailout in Spanish history doesn’t seem to have affected this weekend crowd: There are no lines of people trying to take out their money.

But if Europe’s debt crisis has barely diminished the crowds in Madrid’s popular tapas bars and shops, Spain’s own banking crisis just might.

Investors are holding their breath for a run on Spanish banks, as depositors quietly worry whether their money is safe. Electronic transactions are up slightly, with money flowing from smaller Spanish banks to larger ones, and even to accounts outside the country, though the volume is far less than in more deeply troubled Greece.

“The moment they start saying, ‘Don’t worry, your money will be safe,’ is the moment you should withdraw your money from the bank,” said Julian Mezzadri, 37, who took all of his savings out of a Madrid bank two weeks ago, on news of a government bailout for Spain’s biggest real estate lender, Bankia.

He said he and his wife now keep their money hidden in a box.

Mezzadri was born in Argentina, and even though he has lived in Spain since he was 3, he is haunted by his native country’s 2001 economic collapse.

“I know things are different here, but I’ve also seen what can happen,” he said. “I’m not taking any chances here.”

Such fear could sabotage the system. On May 17, Bankia’s shares temporarily lost nearly a third of their value after a Spanish newspaper reported that more than $1 billion had been withdrawn from the bank in the previous week. In a hastily called news conference, the government denied that there had been a run on the bank, and shares recovered some, but not all, of their losses.

Bankia’s new chairman, Jose Ignacio Goirigolzarri, acknowledged Saturday that there had been “a certain tension” regarding deposits for a few days this month. But he told reporters that the situation had calmed, and predicted that by next month Bankia’s deposits might even exceed 2011 levels.

Bankia, Spain’s fourth-largest bank, has been weighed down by unpaid construction and mortgage loans and needs recapitalization because of the loss in market value of its real estate assets, Goirigolzarri said.

He spoke several hours after the Bankia board asked the government late Friday for nearly $24 billion, more than double what the government had forecast just two days earlier would be needed to rescue the bank. Many worry that Spain simply can’t afford it.

“No one knows. The government will have to resort to the [bank recapitalization fund] and contributions from the deposit insurance fund,” said Juan Jose Toribio, an economist at Spain’s IESE Business School.

Even if Madrid can cover the cost of Bankia’s bailout, Toribio said, it is “very possible” that additional Spanish lenders might need rescuing.

The Standard & Poor’s ratings agency also announced downgrades late Friday of five Spanish banks, dropping the credit ratings of three, including Bankia, to junk status. All five are cajas, community banks, which are required to invest depositors’ money in local development projects with supervision of local politicians.

When Spain’s housing and job markets collapsed, the cajas were hit hardest because they specialized in construction and real estate lending, and their investments were not as diversified as those of national or global banks. The previous Socialist government’s strategy was to force mergers of small cajas, combining their assets to try to strengthen them against losses. Instead, the result in most cases was simply bigger banks with bigger debts.

Bailing out Spain’s entire banking sector, and the cost of insuring its $1.25 trillion in deposits, would far exceed the price tag for rescuing smaller Greece. Spain would almost certainly need international aid to do so. The question is how many banks — what proportion of the entire banking system — Madrid could manage to prop up on its own.

Markets probably will deliver their verdict on Bankia’s bailout when trading resumes Monday in Europe, and a day later in the United States, after the Memorial Day holiday.

Goirigolzarri said Saturday that Bankia’s woes should not cast doubt over Spain’s entire banking sector, nor spread to the larger Eurozone.

But some economists say they already have.

“All financial crises have occurred when there’s this panic spreading and everybody thinks that something is going to happen,” said Gonzalo Garland, at Madrid’s IE Business School. “And if too many people think something is going to happen? Well, then it happens in the end.”

Frayer is a special correspondent.