Bloomberg News

Spain May Use Its Debt Instead of Cash for Bankia Group

May 28, 2012

Spain nationalized the Bankia group on May 9, leading the lender with the biggest Spanish asset base to request 19 billion euros of government backing to clean up lending to property developers and other loans such as residential mortgages. Photographer: Angel Navarrete/Bloomberg

Spain nationalized the Bankia group on May 9, leading the lender with the biggest Spanish asset base to request 19 billion euros of government backing to clean up lending to property developers and other loans such as residential mortgages. Photographer: Angel Navarrete/Bloomberg

Spain is considering using debt issued by the government or its bank-rescue fund instead of cash to prop up the Bankia group, adopting a mechanism that would free it from raising the money from investors.

The government hasn’t made a decision on whether to use its debt to recapitalize the nationalized lender and will decide in two or three months, a spokesman for the Economy Ministry, who asked not to be named in line with its policy, said in a phone interview today. Prime Minister Mariano Rajoy said at a Madrid news conference today the government hadn’t spoken to the European Central Bank about such a step.

Spain nationalized the Bankia group on May 9, leading the lender with the biggest Spanish asset base to request 19 billion euros ($23.9 billion) of government backing to clean up lending to property developers and other loans such as residential mortgages. The size of the support needed for Bankia, and the implication that other banks may also need state support to repair their balance sheets, pushed 10-year yields today to the most relative to German bunds since the euro was created.

“It’s getting increasingly ugly because of the circularity of the problems,” said Georg Grodzki, who helps oversee $515 billion at Legal & General Investment Management in London, adding that 19 billion euros “now seems too much” for the Spanish government to raise directly in the markets. “The phrase ‘house of cards’ comes to mind.”

Bankia Shares Fall

Rajoy repeated at today’s news conference that Spain has no plans to seek a European Union bailout for its banks. Even so, he said the euro region’s bank rescue fund should be able to bypass national governments and recapitalize lenders directly.

The nationalization of Bankia, a group with an asset base that’s about a third the size of Spain’s gross domestic product, wouldn’t affect the country’s budget deficit, said Rajoy. Spanish newspaper El Pais reported the plan to use government debt yesterday.

Bankia shares fell as much as 29 percent in Madrid and closed 13 percent lower at 1.36 euros. The yield on Spain’s 10- year bonds climbed more than 16 basis points, or 0.15 percentage point, to 6.45 percent at 5:49 p.m. in Madrid.

Record Spreads

The Spanish-German spread expanded to as much as 513 basis points, the most since the euro’s introduction in 1999, and was last at 511 basis points. Rajoy said today the nationalization of Bankia had no impact on the Spanish spread.

Shares in other Spanish banks slid today as investors weighed the likelihood that the bigger cleanup of Bankia would also force them to make more provisions than those already ordered by the government. Banco Popular Espanol SA (POP) fell as much as 8.3 percent before closing 7.5 percent lower and CaixaBank SA (CABK) fell 5.1 percent and Banco Santander SA (SAN) 3.2 percent.

The Bankia group’s announcement of its need for government support “surely raises the bar and may set the basis for what other banks may be expected to do in terms of incremental impairments,” Carlos Berastain, an analyst at Deutsche Bank AG in Madrid, said in a report today.

Based on what happened at Bankia, the recapitalization needs of Spain’s banks could amount to as much as 60 billion euros, Daragh Quinn, an analyst at Nomura International, said in a report today. “Given the current economic and political uncertainties facing the euro zone, this could see additional pressure on Spain to consider using external funds for the bank recapitalization,” he wrote.

‘ECB Scam’

Spain established a mechanism in February for using debt issued by the government or the bank-rescue fund, known as FROB, to recapitalize banks. Lenders can use government-issued debt as collateral to borrow from the ECB. The FROB has 5 billion euros of available funds, leaving its ability to bail out lenders dependent on Spain’s access to markets.

“It takes the ECB scam to a new level -- not only has it become the lender of first resort for large parts of the euro- zone banking system but it is now also being abused as a source of capital,” Grodzki said in a phone interview today, referring to the possibility that the government may recapitalize Bankia (BKIA)’s parent company with its debt.

An ECB spokesman said in a phone interview that its “monetary policy framework operates as usual” and that it would refer questions on Bankia’s recapitalization to authorities in Spain.

Risks to Spain’s financial industry and the state are becoming increasingly intertwined as the government’s access to borrowing narrows.

Foreign investors cut their holdings of Spanish debt of 37 percent Spain’s total outstanding debt in circulation in April from 50 percent at the end of last year. Domestic lenders, bolstered by emergency funding from the ECB, have picked up the slack, increasing their share to 29 percent from 17 percent over the same period.

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Charles Penty in Madrid at cpenty@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net


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