Hoping to put an end to a four-year banking crisis, Spain’s government effectively took over Bankia SA, one of the country’s biggest banks, late on Wednesday after days of market anxiety over the lender’s viability.
The government is also preparing to inject public funds into the banking group with the most Spanish real estate as part of government efforts to bolster confidence in the country’s lenders.
The centre-right government of Prime Minister Mariano Rajoy said the banking sector was safe and said more measures to strengthen ailing lenders would come on Friday after a February banking reform proved insufficient.
The sector has been through three major overhauls since a building and property market crash in 2008, which left lenders with what is now about Euro 184 billion ($238 billion) in toxic assets including repossessed housing complexes that stand empty.
Spain’s bank bailout fund will convert its Euro 4.5 billion ($5.8 billion) of preferred shares in Bankia’s parent company Banco Financiero y de Ahorros, or BFA, into voting shares, the economy ministry said in a statement. The action will give it a controlling stake of 45 per cent in Bankia, the ministry said, adding the government will provide the capital that’s “strictly necessary” to clean up the lender.
Bankia is by far the largest of eight banks that the government has rescued in recent years.
It was formed in 2010 when the government forced a number of savings banks into a merger to try to save them.
“Bankia is a solvent entity that continues absolutely normal operations and its clients and depositors have no cause for concern,” the central bank said in a statement.
Spain’s country risk, as measured by the spread between yields on its 10-year benchmark bond and the German benchmark, eased slightly but held close to six-month highs .
The state took complete control of Bankia’s parent company BFA by converting an earlier 4.5 billion euro rescue loan into equity. That gives the government 45 percent of Bankia, but it is expected to merge the two entities and control both.
The government is also expected to pump another 10 billion euros of loans or cash into Bankia to cover the hole from bad loans.
Some experts criticised the piecemeal approach over the past few months. An executive board member of the European Central Bank said it was time to present “a complete strategy”.
“So far the action was taken too much on a case by case basis,” Joerg Asmussen told German financial daily Handelsblatt.
“This strategy must entail two things. First, an independent assessment of the total assets of the banks to create trust from the outside ... secondly, whether one wants to create a central bad bank to outsource bad assets.”
