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Bank in Spain asks for bailout

Credit rating agency Standard & Poor’s has downgraded Bankia and four other Spanish banks to junk status because of uncertainty over restructuring and recapitalization plans. 

Associated Press

Credit rating agency Standard & Poor’s has downgraded Bankia and four other Spanish banks to junk status because of uncertainty over restructuring and recapitalization plans. 

MADRID — The board of directors of one of Spain's troubled banks, Bankia, has asked the Spanish government for $23.8 billion in financial support.

Jose Ignacio Goirigolzarri, the bank's president, said late Friday that the bailout would "reinforce the solvency, liquidity and solidity of the bank."

The request came on the same day that credit rating agency Standard & Poor's downgraded Bankia and four other Spanish banks to junk status because of uncertainty over restructuring and recapitalization plans.

Concern about the health of Europe's banks is a key component of the region's financial crisis. Spanish banks are seen as particularly shaky because they were heavily exposed to the country's collapsed real estate bubble and now hold large amounts of soured investments, such as defaulted mortgage loans or devalued property. Bankia has been the worst hit and holds $40 billion in such toxic assets.

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 percent.

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.

Spanish Prime Minister Mariano Rajoy met with Socialist opposition leader Alfredo Perez Rubalcaba late Friday to try to map out a strategy.

The big fear is that if Greece eventually leaves the euro, confidence in other financially weak countries such as Spain and Italy could fall, causing the value of their bonds to drop. Ultimately, 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.

Peter Praet, who sits on the European Central Bank's six-member executive committee, said there should be a eurozone-wide banking regulator with the money and the authority to restructure banks operating across borders, as well as a deposit insurance program similar to the U.S. Federal Deposit Insurance Corp. Both measures would be funded by the private sector to not expose taxpayers to more banking crises.

The flareup in the debt crisis in recent months, with a Greek exit from the euro openly discussed, has sent Spain's borrowing costs soaring.

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 percent in early afternoon trading. A rate of 7 percent is considered unsustainable over the long term.

Bank in Spain asks for bailout 05/25/12 [Last modified: Friday, May 25, 2012 11:14pm]
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