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Negative Valuation Of Bankia May Inflict Losses On Shareholders

News Posted On: 31 December 2012

Ever since 2008, the Spanish economy has been in financial turmoil. Real estate values have recorded significant declines and the rate of unemployment in the nation is the highest ever! In efforts to ease the mounting pressure on its economy, the Spanish government had decided to set up a bad bank that would help recover the real estate market. However, recent reports suggest that individuals who hold shares in Bankia – the country’s nationalised lender, will likely incur huge losses after the rescue fund of the bank revealed a minus 4.2 billion euros valuation. This was the last move prior to the addition of eighteen billion euros into Bankia.

FROB, the rescue fund dealing with state banks also revealed that BFA, the parent group of Bankia, was worth minus 10.4 billion euros. According to the principles of the law, shareholders will be the first to incur losses. However, the rescue fund did not mention the percentage of current shares that are likely to be diluted. Real estate analysts in Spain say that investors are likely to lose a good proportion of their invested amounts, perhaps even all of their investment, although they are not sure exactly how much until the first few months of next year.

Real estate agents believe that it’s still very early to forecast how much money will be lost by shareholders, but they are certain that the effect of dilution will be clear. The FROB revealed that 99 per cent of the shares in Banco de Valencia would be purchased by the fund, prior to selling them to CaixaBank. Meanwhile, individuals who hold shares in other lenders such as Catalunya Banc and NCG Banco will be eliminated.

The Bad Bank Isn’t Helping

The burst of the real estate bubble had been a cause for concern since 2007. However, its effects were significant in 2012 as the nation sought a credit of 100 billion euros from the continent, so as to help in its banking industry’s recapitalisation. Real estate has been identified as one of the most crucial sectors that have been responsible for the nation’s change in fortune. Prior to the unfolding of the economic crisis, Spain was among the most active real estate markets in Europe. However, prices and property values have dropped incredibly over the past five years and investors seem to have lost confidence in the Spanish property market.

The result of the crisis forced Spain to establish a bad bank that would store all the toxic property assets and hold them until offers are made for the same. While this system was expected to help Spain get out of the mess, it hasn’t quite lived up to expectations. Spanish locals who own properties and have still not paid off their mortgages see their homes seized by the banks, leaving them on the streets. The bank is also finding it hard to sell these properties at good prices, thereby making losses and leaving the economy in its current slump.

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