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May 26, 2012

Bankia shares suspended amid bailout request reports

Trading in shares in Spain's Bankia has been suspended in Madrid. It asked for them to be suspended ahead of a board meeting this afternoon to reformulate its accounts for 2011 and submit a plan to shore up its finances.


The bank is reported to be due to ask the government for a bailout of more than 15bn euros ($19bn; £12bn). Also on Friday, there were appeals for help from another Spanish institution: its wealthiest autonomous region, Catalonia.

"We don't care how they do it, but we need to make payments at the end of the month," said Catalan president Artur Mas.

"Your economy can't recover if you can't pay your bills." Catalonia represents one-fifth of the Spanish economy. It has to take out 13bn euros of loans this year to refinance maturing debt, not to mention funding whatever deficit it has for the current year.

The regions have been having trouble borrowing money commercially, so the central government has given them a special credit facility from the Official Credit Institute (ICO).

Those credit lines run out in June and the government has said it will come up with a new mechanism to provide credit for the regions, but there has been some nervousness amid reports that there is disagreement within the government about what form the guarantees should take.

Part-nationalised bank

Bankia, which is Spain's fourth-largest bank, was part-nationalised two weeks ago because of its problems with bad property debt.As part of the process, the government injected 4.5bn euros into the bank.

Economics professor Pedro Schwartz said Spain's bank reorganisation fund, Frob, only has 6bn euros left, so the government will have to find the additional money to support Bankia elsewhere. "It won't try to find that money by issuing more bonds - because the bonds are very expensive."

"The feeling of the market here is that it might have to be a rescue from the European Union. That is casting a shadow over the whole financial sector in Spain at the least agreeable moment ," said Prof Schwarz from University of San Pablo-CEU in Madrid.

On Friday, the yield on Spanish government bonds, which are taken as an indicator of how much it would cost the state to borrow money, rose to 6.3% having started the day below 6%.

Potential losses

Spain's economy minister Luis de Guindos said on Wednesday that the government would pump at least 9bn euros into Bankia but that more would be available if it was needed.

Shares in Bankia's parent company Banco Financiero y de Ahorros (BFA) have also been suspended. Bankia had to reassure its savers last week that their money was safe after a Spanish newspaper reported a run on the bank.

Bankia was created in 2010 from the merger of seven struggling regional savings banks. It holds 32bn euros in distressed property assets. Its shares fell 7.4% on Thursday to close at 1.57 euros, which is 58% down from their listing price in July 2011.

'Huge exposure'

There have been four attempts by Spanish governments to shore up the banking system since the global banking crisis of 2008.

As part of the latest plan, lenders are having to make 30bn euros of extra provisions to cover potential losses on property loans, which comes on top of 54bn euros they were ordered to set aside in February.

The health of Spain's banking system is key to whether the country eventually needs to seek a bailout itself from the eurozone and the International Monetary Fund.

But Professor Santiago Carbo Valverde of the University of Granada, told the BBC that he thinks Spain's other large banks are not in as difficult a situation as Bankia.

"Bankia has huge exposure to real estate and bad loans, much larger than other banks.

"Other banks may have trouble as the government is demanding more capital, but I don't think we will have another big case like Bankia.

"The three largest ones are in better shape as they have lower exposure to bad loans and they are more internationally diversified."

Spain's credit rating was downgraded by Standard & Poor's last month on the basis that it would probably have to take on more debt to support its banks.

bbc.co.uk

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