It is increasingly likely that Italy (which has been busy bailing out various insolvent banks while pretending it isn't) won't be the first nation to try out Europe's new BRRD "bail-in" insolvency directive. Instead, that honor may go to Spain where the sixth-largest bank, Banco Popular plunged the most in 28 years amid investor concerns that the bad debt-laden bank may have to liquidate as neither a buyer nor a new capital raise appear likely.
As discussed yesterday, the underlying problem with Popular, as with most European banks, is familiar: the bank has been unable to sell €37 billion of nonperforming property loans fast enough, and is racing to find a partner after Spain's Economy Minister Luis de Guindos declined to consider a public bailout, while a capital increase has faced resistance from existing shareholders. The bank has said previously it could extend a June 10 deadline for binding takeover offers. So far none have emerged, which has prompted concerns about a deposit run, and - in circular fashion - sent the bank's asset prices crashing, which in turn is prompting depositors to pull even more money out of the bank, and so on...
But besides depositors, the plunge appears to have also spooked the bank's own employees, and today Spain's Expansion paper reports that Banco Popular Chairman Emilio Saracho sent a letter to staff assuring them the bank remains solvent after Friday's stock crash. In the letter, Saracho says the bank is facing “difficult circumstances, but we’re making the greatest effort to overcome them." Furthermore, the Chairman says that Popular has a number of options, citing a possible capital increase or corporate deal. What he didn't say is that the reason why the stock is where it is, is because the market no longer believes either of these options is credible.
More from the latter, courtesy of Expansion, google translated:
"From the management we are aware that the information that is being published affects the work and the spirit of each one of you, but our obligation as professionals is to focus on the day to day and on the clients, since the activity of the bank must continue as it has so far" begins the statement, whose target is the Professional Association of Directors Banco Popular.
The central message of this letter sent yesterday is the following: "Banco Popular remains solvent and has positive net worth".
"Our bank is in a difficult situation," says Saracho. "For this reason and in order to meet the regulatory requirements that the European Central Bank demands for next year and guarantee our strength and future, we are working on different alternatives.
"Our customers and our shareholders are the most important thing for us, and for this reason we must send them a message of confidence and confidence that we are making every effort to overcome this situation," the letter concludes.
In short, Saracho urged the bank's group of 1,800 managers to continue working hard; saying business activity should go on as normal, and that it was important to instill confidence in clients and shareholders. Unfortunately, one look at the bank's recent surge in default risk as seen in its senior bond CDS, suggests that "those who panic first", may be doing the smart thing...