The Bank of Spain announced that it is looking rescue Bankia SA by taking a controlling share, according to the Wall Street Journal.
The move would convert the 4.5 billion euros of bailout funds from the Spanish government to common shares, giving Spanish authorities control of Bankia’s parent company, Banco Financiero y de Ahorros SA (BFA).
BFA is Bankia’s largest shareholder, owning 45 percent of the bank.
Premier Mariano Rajoy ordered the rescue after auditors refused to sign off on the banks books because of allegations of 3.5 billion euros of inflated assets. The Bank of Spain has also demanded that Bankia get rid of assets as part of the deal.
Currently, about half of Bankia’s 37 billion euros of property loans are deemed “problematic” by regulators.
“The Spanish have denied until now that there was any need for fresh capital so it comes as a surprise. It wasn’t intended, and that is a worry,” said Guy Mandy, credit strategist at Nomura.
The risk posed by Bankia’s failure, however, may be only a small part of a larger cascade of bank failures on the horizon for Spain.
According to Euronews, Spain’s banks have nearly 300 billion euros exposed in the building sector which is equivalent to 30 percent of Spain’s gross domestic product. More problematic is that repayment is unlikely for at least 184 billion euros worth of those loans.
Recent troubles in Greece have exacerbated the eurozone crisis and caused uncertainty as to how the crisis could be resolved. There are serious concerns that Greece could leave the eurozone, causing a flight of deposits out of southern Europe.
“The contagion risks are woefully underestimated. If Greece is forced out of the euro, it will set off deposit flight across southern Europe. This is becoming very dangerous. They seem to think that Greece is a one-off case but once you create a blueprint for exit, everything changes,” said Andrew Roberts from RBS.
Recently, markets took note of Spain’s economic and debt woes and 10-year Spanish bond yields increased to over 6.07 percent last Wednesday.
Premier Rajoy has promised that no more public funds would go to rescuing failing banks, but he has had to reverse his position as more banks look as if they made need to be taken over. Financial sources say he will announce a plan on Friday to have lenders set aside another 35 billion euros to cover bad loans on top of the already 54 billion euros already demanded.
However, some lenders may find it hard to divert extra funds without government assistance, which means there’s a good chance Madrid will have to step in to bail them out.
“It depends what’s announced, but right now it feels like smoke and mirrors and not the cathartic moment that Spain needs. It looks more like the government has panicked and pushed something out,” said Ben Levett, analyst at consultancy 4Cast.
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