Conservative Spanish prime minister Mariano Rajoy insisted today that the country’s banking sector would not need an international rescue as concern over the bailout of nationalised lender Bankia sent its stock price plummeting while Spain’s borrowing costs soared.
“There will be no rescue of the Spanish banking sector,” Mr Rajoy said.
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 today – Bankia’s first day back on the stock exchange following its announcement on Friday that it would need the €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. The country’s borrowing costs have risen sharply over the past few weeks.
Today Spain’s interest rate, or 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 and dismissed suggestions it had anything to do with Bankia.
A rate of 7% is considered unsustainable over the long term and there is concern that Spain might soon be pushed join the ranks of Greece, Ireland and Portugal and seek an international bailout.
The prime minister said that the government had not yet decided how it would proceed in funding the Bankia bailout.
But the Economy Ministry said earlier today that it is considering injecting government debt into Bankia’s accounts. The bank could then turn to the European Central Bank and use those bonds as collateral to receive cash for the recapitalisation.
Analysts said that such a technique would only prove to investors that the country is having difficulties raising money on the international debt markets and would therefore make them even more reluctant to buy Spanish debt.
“It sends a signal of a lack of confidence,” said Mark Miller of Capital Economics in London.
Oscar Moreno of Madrid brokerage Renta4 said the government has little choice: either use this uncommon technique or simply ask the European Union for money to bail out the banking sector – which Mr Rajoy has vehemently ruled out as unnecessary.
Mr Moreno said Bankia’s share price drop, and the rising bond yield, showed investors the Spanish banking sector’s woes are getting worse. Only last week, for instance, Economy minister Luis de Guindos said the government would inject about €9bn into Bankia.
“Basically, what the investor sees is that, with what has emerged with Bankia, more money is going to be needed than what was originally stated” in two government decrees ordering banks to put aside a total of some €80bn in provisions to cushion against losses from real estate, Mr Moreno added.
Spain’s rocky financial situation has been made worse due to overspending by its semi-autonomous regions. One of the regional governments, Catalonia, called for financial assistance last week, claiming it was running out of options to refinance its debts.
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.”
Concern about the health of Europe’s banks is a key constituent of the region’s financial crisis. While Spanish banks suffer mainly from soured real estate investments, they and their counterparts across Europe also hold massive amounts of shaky government bonds. As the financial crisis worsens, those bonds lose value, hurting the banks.
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.