Spain will reluctantly swoop in with public money this week to clean up bad loans at its largest group of savings banks, Bankia, the government said yesterday.
Bankia, Spain’s fourth-biggest listed bank created from a merger of seven savings banks, is the most exposed to Spain’s property market, which collapsed in 2008, destroying millions of jobs and leaving piles of bad credit.
Spain’s financial sector is a significant concern to investors, who fear the unknown cost of rescuing the industry could derail efforts to stem a rapid rise in sovereign debt and stave off a bailout.
“We are finalising a plan to clean up the bank,” said an economy ministry official.
The scheme would use public money and changes in Bankia management were also likely, the official said, adding that it would probably be announced by Friday.
The state is likely to use contingent convertible bonds, he said. These bonds convert into equity in certain circumstances, for example if a bank’s core capital falls below a set ratio.
The leading daily El Pais estimated Bankia would need €5-€10 billion to repair its balance sheet. Business daily Expansion put the figure at €5-€7 billion.
Those reports were “not far off track”, said the official, declining however to give any figure.
Prime Minister Mariano Rajoy’s conservative government, which swept to power in December vowing to heal the ailing economy, had previously refused to countenance the use of public money to rescue the banks.
Mr Rajoy has already ordered Spanish banks to set aside €54 billion in provisions against property-related assets.
But the Prime Minister said yesterday that he would use public money if necessary to avoid a systemic collapse.
“If it were necessary to prompt lending, to save the Spanish financial system, I would not decline to do as all the countries in the European Union have done and inject public money,” he told Onda Cero radio.
“But that would be a last resort.”
The premier said new banking legislation would be announced on Friday to help banks deal with their assets. But the Spanish leader said he was “not in favour of a bad bank”, an entity that would regroup bad assets and shift their risk away from commercial banks to the government.
“The fundamental aim is that there be no doubt about the financial state of Spanish financial entities – that everyone knows they are solvent and can do their job and repay what has been lent to them” on markets and during the restructuring, Mr Rajoy added.
He insisted that if any more public money had to go into the banks, it would not compromise the tough deficit targets.
“Public money will only be used in an extreme situation, this will not affect the public deficit,” he said.
Mr Rajoy is under pressure from eurozone neighbours and financial markets to lower Spain’s deficit from 8.5 per cent of gross domestic product last year to 5.3 per cent this year and three per cent in 2013.
The International Monetary Fund last month urged Spain to push further ahead with banking reforms.
Clearly targeting Bankia, the IMF said in a report: “To preserve financial stability, it is critical that these banks, especially the largest one, take swift and decisive measures to strengthen their balance sheets and improve management and governance practices.”