NATIONALISED SPANISH lender Bankia will seek €19 billion in state funds to cover writedowns on residential mortgages and lending to companies, taking the cost of rescuing Spain’s fourth biggest lender to €23.5 billion.
Spain is considering directly injecting its own government debt into Bankia and its parent, BFA, to help fund the stricken lender’s €19 billion nationalisation, in an attempt to sidestep borrowing money directly from the bond markets.
The plan, viewed as unorthodox by analysts, involves Madrid issuing Spanish government-guaranteed debt to Bankia in return for equity, with the bank then able to deposit the bonds with the European Central Bank as collateral for cash.
By giving bonds to Bankia, the government would be able to circumvent the expense of selling debt in the market at interest rates close to euro-era highs, Spain’s ministry of economy said.
But the admission by Madrid that borrowing in the markets is too expensive – and the idea of using the ECB to temporarily fund at least part of its bank rescue plan – surprised analysts.
Stock markets have been unsettled in recent weeks by fears that bad loans held by Spanish banks may be so large that Spain would be forced to seek an international bailout.
The concern coincides with uncertainty about Greece’s future in the euro zone, which has erased about $4 trillion (€3.2 trillion) from the value of global equities during May.
Bankia chairman José Ignacio Goirigolzarri attempted to calm fears at a press conference on Saturday, saying he was optimistic about Bankia’s future. “I’m confident about developing a solvent brand.”
Bankia’s request for a €19 billion bailout to cover possible losses on repossessed property, loans and investments is in addition to the €4.5 billion the Spanish government had already pumped in.
BFA is preparing to sell stakes it holds in companies to meet European competition rules.
Meanwhile, Charles Dallara, managing director of the Washington-based Institute of International Finance, said the cost of Greece leaving the euro would be unmanageable and probably exceed the €1 trillion previously estimated by the institute. The projection of €1 trillion from earlier this year was “a bit dated now” and “probably on the low side”, Mr Dallara said in an interview with Bloomberg.
“Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again.”
Spain, Italy and the already bailed out Ireland and Portugal “remain quite vulnerable to changes in market sentiment”, he said, urging policymakers to remember the shockwave caused by the failure of Lehman Brothers.
Mr Dallara added that he expected the Spanish banking sector’s woes would be “manageable” overall.
As Irish voters prepare to go to the polls on Thursday to give their verdict on the European fiscal treaty intended to stabilise the region’s economy, a growing number of senior business figures have confirmed that they are examining contingency plans for a Greek exit from the euro zone and its possible €1 trillion-plus fallout.
The Lloyd's of London insurance market has reduced its exposure to the euro "as much as possible" in preparation for a collapse of the single currency, its chief executive, Richard Ward, told the Sunday Telegraph. – (Additional reporting: Copyright the Financial Times Limited 2012, Bloomberg, Reuters)