Spain's Fred Goodwin has sunk the country's credibility

If there was any doubt that Spain is headed the way of Portugal and Ireland (if not quite Greece just yet), the Bankia affair has just removed it.

The country is in dire straits and the public face of the disaster is Rodrigo Rato (roughly translated as Roland Rat) who was forced to resign as boss of Bankia when it was forced to seek a €19bn government bailout.

With strong echos of Fred Goodwin he walks away with a cool €12 million or so in compensation and accrued pension benefits.  He was only at the bank a year and, while he can't be blamed for the property losses which sank the mega-bank (they were accumulated long ago by the various dodgy institutions that were roped together to form Bankia), he is certainly culpable.

This bank had already been recapitalised once when it took the opportunity to raise €3bn from the markets (i.e. pension funds and private investors who have now been almost wiped out).  The bank continually lied to the outside world about the true extent of its losses even declaring a profit of €300m just months before an external investigation revealed the true scale of the disaster.

A parliamentary inquiry and a judicial investigation into criminal charges have been called but the rat will scurry away from the sinking ship unharmed no doubt.

The Spanish public are angry and somewhat scared I think.  They have every right to be on several counts:

- Spain obviously doesn't have the money for the bailout and its European "friends" are not about to stump up

- The scale of the losses at this one bank tells the markets that the dire predictions about the Spanish banking sector as a whole (€200 billions of undisclosed write-offs) might not be far off the mark

- Spain has lots of similar hidden liabilities like the unpaid bills of its regional governments (€37 billion they say but no one knows) and a €24 billion slush fund I wrote about recently (are Spanish electricity bills about to soar?)

- But the worst thing is that the government's credibility is also sunk along with Rato's.  The previous administration encouraged the initial merger and the current one signed off on a much smaller recapitalization only days before the final shocking denouement.

The markets have given up on Spain and the spread over German bonds (the extra interest that Spain has to pay for its borrowings) is now at a record 5,4%.  It would be much higher if the markets were not wary of the ECB suddenly changing course and directly intervening in bonds markets; that is the only thing making Spain other than a one way bet.

This risk premium - la prima de riesgo - is now watched by the public like football scores or lottery draws.  They know that the game is almost up - financial chaos and humiliation is inevitable unless the ECB or Germany come up with some kind of deal.  And fast.

From our website   A guide to Spanish pension benefits