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Why merging Spain’s troubled banks won’t fix the country’s debt crisis

Bank mergers solve the debt crisis. At least that is the strongly held view in Madrid, where Spanish prime minister Mariano Rajoy is considering yet another rescue, this time involving a possible merger of Ibercaja with rivals Liberbank and Caja3.

It follows a longstanding policy, established by the previous socialist administration, that smashing together almost all the troubled cajas, which operate much like building societies, into larger clusters is the way out of the crisis.

No amount of argument has dissuaded Rajoy, despite the most high profile victim of the financial crash turning out to be Bankia, which is the result of a seven cajas coming together.

A bigger banking group means a bigger balance sheet to bear the heavy load of debt – that’s the thinking. But a bigger balance sheet is matched by bigger debts. So in Bankia’s case, instead of some heavily indebted cajas and other well financed groups, Spain finds itself with one unstable institution housed in the bank’s Madrid HQ.

via Why merging Spain’s troubled banks won’t fix the country’s debt crisis | Business | guardian.co.uk.

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