Spain's Bankia to ask for more government aid

MADRID - The board of Bankia, the large Spanish bank that was taken over by the government, met Friday to discuss a restructuring plan that will include a request for more state aid, bolstering calls for a co-ordinated relief blueprint for Europe's fragile financial sector.

Trading in shares of Bankia, the country's fourth-largest lender, were suspended Friday while its board determined how much new aid it needs. The bank's shares have whipped about violently in recent weeks on fears it could succumb to the massive losses it has built up in the country's collapsed real estate sector.

The Spanish government said this week it would pump at least C9 billion ($11 billion) into the lender but added that more would be available if needed. Spanish newspapers quoted unnamed market sources as saying the bank will likely ask for up to C15 billion ($19 billion). Neither the bank nor the Economy Ministry would comment on the reports. The bank has called a press conference for Saturday to explain the restructuring.

"I don't know if the figures will be greater or smaller than those being talked about because I am not responsible for the information that is coming out," said Deputy Prime Minister Soraya Saenz de Santamaria at a weekly government press conference.

Concern about the health of banks is a key ingredient in Europe's financial crisis. While Spanish banks suffer mainly from soured real estate investments, they and their counterparts across Europe also hold massive amounts of shaky government bonds. As the financial crisis worsens, those bonds lose value, hurting the banks.

The big fear is that if Greece eventually leaves the euro, confidence in other financially weak countries like Spain and Italy could fall, causing the value of their bonds to drop. Ultimately, the worry is that could undermine confidence in the system and create bank runs.

To avert such a disastrous scenario, financial experts are increasingly calling for a Europe-wide support system for the banks.

"The euro area financial stability framework needs an urgent overhaul," said Peter Praet, one of the European Central Bank's six-member executive committee.

He said there should be a eurozone-wide banking regulator with the money and authority to restructure banks operating across borders as well as a deposit insurance program similar to the U.S. Federal Deposit Insurance Corporation. Both measures would be funded by the private sector, not the government, to not expose taxpayers to more banking crises.

Spanish banks are particularly shaky because they were heavily exposed to the country's burst real estate bubble and now hold massive amounts of soured investments, such as defaulted mortgage loans or devalued property. Bankia has been the worst-hit and holds C32 billion ($40 billion) in such toxic assets.

Bankia S.A. was created from the merger of seven regional banks, or cajas, that were deemed too weak to stand alone. But financial concerns have continued to plague it -- the price of its shares has fallen more than 50 since they went public last July. The government decided to intervene earlier this month, effectively nationalizing Bankia. Its shares closed at C1.6 ($2.01) on Thursday after shedding more than 7 per cent.

The Spanish government is trying to shore up the banking sector to get credit flowing to the ailing economy. But the cost of rescuing banks could overwhelm government finances, which are strained by a recession and an unemployment rate of nearly 25 per cent. The possibility that the Spanish government might eventually need an international rescue package -- like the ones Greece, Ireland and Portugal sought -- has kept investors on edge for months.

Asked whether Spain would seek outside help for its banks, Saenz de Santamaria, reiterated the government's position, saying firmly, "Not at all."

The flare-up in the debt crisis in recent months, with a Greek exit from the euro openly discussed, has sent Spain's borrowing costs soaring to levels that Prime Minister Mariano Rajoy said the country could not put up with for very long.

The yield for key 10-year bonds on the secondary market -- an indicator of investor wariness -- edged up 0.02 percentage points to a perilously high 6.18 per cent in early afternoon trading. A rate of 7 per cent is considered unsustainable over the long term.

Foreign investors in particular appear to be dumping Spanish government debt. In the first four months of the year the amount they held fell 24 per cent to C213 billion, according to the latest figures released Friday by the Economy Ministry. As of the end of 2011, foreign investors held just over 50 per cent of Spain's debt but by the end of April that figure dropped to 37.3 per cent.

In yet another bid to boost the recession-plagued economy, the government approved a reform to cut red tape and make it easier for Spaniards to open small businesses. Under the reform, would-be merchants would simply have to pay a tax and file a single document with their local town hall to start work. Now, the process can take as much as 18 months, Saenz de Santamaria said.

In a time of crisis, for entrepreneurs "the least the government can do is roll out the red carpet to open up, and not create difficulties to get their business and jobs rolling," Saenz de Santamaria said.