Spanish bank seeking €19bn bailout

The board of directors of the troubled Spanish bank, Bankia, says it has agreed to ask for €19bn in state funds.

The board of directors of the troubled Spanish bank, Bankia, says it has agreed to ask for €19bn in state funds.

In a statement, the bank’s president, Jose Ignacio Goirigolzarri said the recapitalisation has “reinforced the solvency, liquidity and solidity of the bank”.

The decision came on the same day as credit rating agency Standard & Poor’s downgraded Bankia and four other Spanish banks to junk status because of uncertainty over restructuring and recapitalisation plans.

Trading in Bankia shares were suspended yesterday while its board determined how much new aid was needed.

The bank’s shares have been subject to upheaval in recent weeks amid fears it could succumb to the massive losses it built up in bad loans in the country’s collapsed property market.

Concern about the health of Europe’s banks is a key constituent of the region’s financial crisis.

Spanish banks are seen as particularly shaky because they were heavily exposed to the country’s collapsed property bubble and now hold massive amounts of soured investments, such as defaulted mortgage loans or devalued property.

Bankia has been the worst-hit and holds €32bn in such toxic assets.

Bankia SA was created from the merger of seven regional banks, or cajas, that were deemed too weak to stand alone.

But financial concerns have continued to plague it – its shares have lost almost half their value since the lender went public last July. The government decided to intervene earlier this month, effectively nationalising Bankia. Its shares closed at €1.6 on Thursday after shedding more than 7%.

The Spanish government is trying to shore up the banking sector to get credit flowing to the ailing economy. But the cost of rescuing banks could overwhelm government finances, which are strained by a recession and an unemployment rate of nearly 25%.

The possibility that the Spanish government might eventually need an international rescue package – like the ones Greece, Ireland and Portugal sought - has kept investors on edge for months.

Spanish prime minister Mariano Rajoy met Socialist opposition leader Alfredo Perez Rubalcaba yesterday to try to map out a strategy for the future.

The big fear is that if Greece eventually leaves the euro, confidence in other financially weak countries like Spain and Italy could fall, causing the value of their bonds to drop. Ultimately, the worry is that could undermine confidence in the system and create bank runs.

To avert such a disastrous scenario, financial experts are increasingly calling for a Europe-wide support system for the banks.

“The euro area financial stability framework needs an urgent overhaul,” said Peter Praet, one of the European Central Bank’s six-member executive committee.

He said there should be a eurozone-wide banking regulator with the money and authority to restructure banks operating across borders as well as a deposit insurance program similar to the US Federal Deposit Insurance Corporation. Both measures would be funded by the private sector, not the government, to not expose taxpayers to more banking crises.

Asked whether Spain would seek outside help for its banks, deputy prime minister Soraya Saenz de Santamaria reiterated the government’s position, saying firmly: “Not at all.”

The flare-up in the debt crisis in recent months, with a Greek exit from the euro openly discussed, has sent Spain’s borrowing costs soaring to levels that Mr Rajoy said the country could not put up with for very long.

The yield for key 10-year bonds on the secondary market – an indicator of investor wariness – edged up 0.02 percentage points to a perilously high 6.18% in early afternoon trading.

A rate of 7% is considered unsustainable over the long term.

Foreign investors in particular appear to be dumping Spanish government debt. In the first four months of the year the amount they held fell 24% to €213bn, according to the latest figures released by the Spanish economy ministry. By of the end of 2011, foreign investors held just over 50% of Spain’s debt, but by the end of April 2012 that figure was down to 37.3%.

Bankia also announced that it had also shaken up its board of directors, reducing it from 18 to 10 members.

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