Spanish Government Rescues Fourth Largest Lender, Bankia (May 2012)

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Source: The Guardian – Spanish government rescues fourth largest lender, Bankia

Notable excerpts:

Spain’s conservative government partly nationalised the country’s fourth-largest bank, Bankia, after investors dumped Spanish bonds and stocks amid increasing worries about the country’s banking sector.

Under the deal, €4.5bn (£3.6bn) in government loans given to Bankia over the past two years will be turned into shares in the group’s parent company, the finance ministry said. That will give the state 45% of the shares and, effectively, full control.

“It is a necessary first step to ensure solvency, the tranquility of the depositors and to dispel the doubts of the markets on the capital needs of the entity,” the finance ministry said.

Bankia has more than €30bn of exposure to troubled loans to property developers and repossessed land and buildings.

The government is expected to lend or give Bankia up to €10bn aid overall, although some analysts say it will need more.

The measure is further proof that Spain’s banking sector has failed to digest a huge pile of toxic assets and debt left over by a property bubble that burst four years ago. There have been suggestions that it will need help from the eurozone’s rescue fund to tackle the problem.

Extra reforms will include yet another round of provisioning against toxic real estate with banks ordered to set aside a further €35bn on top of the €54bn already provided, financial sources told Reuters.

Bankia was created just 17 months ago by the merger of seven regional savings banks in an attempt to shore up their combined defences against the bad real estate loans, worthless building land and unsold apartment blocks they had accumulated.

Savings banks, many controlled by local politicians, were the most reckless lenders to developers, land speculators and building companies, which have left Spanish banks burdened with €184bn of problem loans and assets.

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