The European Central Bank (ECB) has rejected a scheme outlined by Spanish authorities to recapitalize its distressed bank Bankia, the Financial Times newspaper reported on yesterday, citing unnamed European officials.
Bankia, a leading Spanish bank, has called for government aid of 19 billion euros (US$24 billion) as part of an overall package of 23.5 billion euros to strengthen shareholder funds.
Spain, itself facing severe difficulties in funding its public deficit and debt, had drawn up a scheme whereby the state would issue debt bonds to Bankia so that the lender could use them as collateral for fresh funding from the ECB, the Financial Times said. It said the central bank had judged this arrangement to be “unacceptable.”
The sources said this method amounted to direct financing of the Spanish state by the central bank, counter to the ECB’s statutes.
Meanwhile, the Wall Street Journal reported more cautiously that the ECB would reject such a scheme if it were proposed, citing unnamed sources.
A spokeswoman for the Spanish economy ministry said on Tuesday that the government’s priority in dealing with the problem at Bankia was to borrow money on the capital market.
However, early yesterday the gap between the rate which Spain must pay to borrow money for 10 years rose to a record risk premium above the German rate, which fell to a record low level.
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