“There will be no rescue of the Spanish banking sector,” said Mr Rajoy, but he added that the government had no choice but to bail out Bankia, which has been crippled by Spain’s real estate slump.
“We took the bull by the horns, because the alternative was collapse,” said Mr Rajoy, stressing that Bankia clients’ savings were now safer than ever.
Bankia, Spain’s fourth-largest bank, is estimated to have €32bn in toxic assets and was effectively nationalised earlier this month when the government converted €4.5bn in rescue funds it gave last June into shares.
The lender’s shares fell 28% on opening in Madrid yesterday – Bankia’s first day back on the stock exchange following its announcement on Friday that it would need €19bn in state aid to shore itself up against its bad loans, a far bigger bailout than expected. The shares, which recovered slightly in the afternoon, closed 13.4 % lower at €1.36.
Bank of Spain estimates show Spain’s lenders are sitting on some €180bn in assets that could cause them losses.
The government fears the cost of rescuing the country’s vulnerable banks could overwhelm its own finances, which are already strained by a double-dip recession and an unemployment rate of nearly 25%, and force it to seek a rescue by the rest of Europe.
Among the chief concerns surrounding Bankia’s request for state aid, the largest in Spanish history, is just how Spain plans to fund it. Spain’s yield, for 10-year bonds on the secondary market — a key indicator of market confidence — rose 0.16 percentage points to close at 6.45%. Mr Rajoy said this had more to do with broader concerns about Europe and Greece than with Bankia. A rate of 7% is considered unsustainable over the long term and there is concern Spain might soon be pushed to seek an international bailout.
The prime minister said the government had not yet decided how it would fund the Bankia bailout, but the Economy Ministry said earlier it is considering injecting government debt into Bankia’s accounts. The bank could then turn to the European Central Bank using those bonds as collateral to receive cash for the recapitalisation. Analysts said that would only prove to investors the country is having difficulties raising money on the international debt markets making them more reluctant to buy Spanish debt.
Spain’s rocky financial situation has been made worse as a result of overspending by its semi-autonomous regions.
Asked about the fragile state of finances of some of Spain’s regions, Mr Rajoy said: “We are not going to let any region or financial entity fall, because otherwise the country would fall.”