Spain may recapitalize Bankia with Spanish government bonds in return for shares in the bank, which last week asked for rescue funding of 19 billion euros (US$24 billion), a government source said on Sunday.
Bankia could use the sovereign paper as collateral to get cash from the European Central Bank (ECB), forcing it to get involved in restructuring Spain’s banking sector, laid low by lending to property developers in a boom that ended in 2008.
The state takeover of its fourth-largest lender, Spain’s biggest bank rescue, has intensified fears that the rising cost of helping banks may force the eurozone’s fourth-largest economy to seek an Irish-style international bailout.
The Spanish Ministry of the Economy declined to comment on the matter on Sunday. EU authorities are expected to sign off plans to recapitalize Bankia next month.
Yesterday, shares in Bankia bank plunged by nearly 27 percent when trading was resumed after a suspension when the bank requested a state-funded bailout.
“I am certain that the Spanish state will obtain the financing, so we will receive the 19 billion euros. That’s the commitment,” Bankia president Jose Ignacio Goirigolzarri told a press conference on Saturday.
The funding would be part of a recapitalization plan that the bank’s board approved on Friday and is backed by the government and the Bank of Spain.
Goirigolzarri said that after the recapitalization, Bankia would be “solid, efficient and profitable.”
However, the Bankia rescue will affect Spain’s public debt to GDP ratio and the deficit at a time when the country has implemented growth-stifling austerity measures aimed at bringing state debt down to Europe-agreed levels.
ECB policymakers, who have pumped more than 1 trillion euros into Europe’s financial system in recent months, are resisting pressure to make further efforts to shore up the eurozone.
“The biggest problem here is that the ECB could object. That’s a legal issue, but technically it is possible,” Intermoney Valores economist Jose Carlos Diez said.
Spain’s borrowing costs have risen in recent weeks as investors fret about a possible exit of Greece from the eurozone, making it less likely that Spain could raise cash needed for the Bankia rescue by issuing new debt.
Spain’s risk premium, as measured by the spread between German and Spanish benchmark bonds, was hovering near 500 basis points on Friday.