Spain may use debt, not cash, to rescue Bankia
SPAIN may consider putting debt issued by the government or its bank-rescue fund into the Bankia group, instead of cash, using a mechanism that would free it from raising the money from investors.
The government had not made a decision on whether to use its debt to recapitalise the nationalised lender and would decide in two or three months, a spokesman for the economy ministry, who asked not to be named in line with its policy, said yesterday.
Spanish Prime Minister Mariano Rajoy said in Madrid yesterday the government had not spoken to the European Central Bank (ECB) about such a step.
Spain nationalised the Bankia group on May 9, prompting the lender with the biggest Spanish asset base to request ¤19bn of government backing to clean up lending to property developers and other loans such as residential mortgages.
The size of the support needed for Bankia, and the implication that other banks may also need state support to repair their balance sheets, pushed 10-year yields yesterday to the most relative to German bunds since the euro was created.
“It’s getting increasingly ugly because of the circularity of the problems,” said Georg Grodzki at Legal & General Investment Management in London, adding that ¤19bn “now seems too much” for the Spanish government to raise directly in the markets. “The phrase cards’ comes to mind.”
Mr Rajoy repeated that Spain had no plans to seek a European Union bail-out for its banks. He said the nationalisation of Bankia, a group with an asset base that is about a third of the size of Spain’s gross domestic product, would not affect the country’s budget deficit.
Spanish newspaper El Pais reported the plan to use government
‘house of debt on Sunday. Bankia shares fell as much as 29% in Madrid and traded 11% lower at ¤1,39 yesterday.
The yield on Spain’s 10-year bonds climbed almost 15 basis points to 6,44% in Madrid. Ireland and Portugal were frozen out of capital markets and forced to seek international bail-outs soon after their yields topped 7%. Spain’s trump card is that it has already issued more than half the debt it needs to this year. ROME — Italian business confidence fell more than economists forecast, declining this month to the lowest level in almost three years as the country’s fourth recession since 2001 deepened.
The manufacturing-sentiment index dropped to 86,2, the lowest since August 2009, from a revised 89,1 last month, Rome-based national statistics institute Istat said yesterday. Economists had predicted a reading of 88,6, according to the median of 16 estimates.
“We are likely to see more drops going forward, also because some taxes introduced by (Prime Minister Mario) Monti’s government will take effect in the second part of the year,” Nicola Marinelli, portfolio manager at Glendevon King Asset Management in London, said.
The euro zone’s third-biggest economy will shrink 1,5% this year as household spending and corporate investment both decline, Istat said in a report last week. That
“If it goes on for much longer, it just adds to the burden of fiscal consolidation,” Investec analyst Elisabeth Afseth said in London. “If a large part of that is spent on paying a premium to borrow, it just makes it so much harder.”
The Spanish-German spread expanded to as much as 513 basis points, the most since the euro’s introduction in 1999, and was last at 509 basis points. Mr Rajoy said the gross domestic product forecast compares with a 1,2% contraction expected by Mr Monti’s government. The statistics institute also said the unemployment rate, at a 12year high of 9,8%, will not start falling until 2014.
“Firms are increasingly concerned about Italy’s economic outlook, with the subindex measuring this sinking to its lowest level since early 2009, which is likely to be a significant drag on employment and investment decisions in the next few quarters,” Global Insight economist Raj Badiani said.
Pessimism among households and businesses has grown after Mr Monti’s government started implementing a ¤20bn austerity plan passed in December that aims to eliminate the deficit in the next two years. The measures included tax increases and higher fuel prices. Consumer confidence plunged this month to the lowest since 1986. Bloomberg nationalisation of Bankia had had no impact on the Spanish spread.
Shares in other Spanish banks also slid yesterday as investors weighed the likelihood that the bigger cleanup of Bankia would also force them to make more provisions than those already ordered by the government. Banco Popular Espanol fell as much as 8,2% and CaixaBank dropped as much as 4,9%.
Based on what happened at Bankia, the recapitalisation needs of Spain’s banks could amount to as much as ¤60bn, Nomura International analyst Daragh Quinn said in a report yesterday. “Given the economic and political uncertainties facing the euro zone, this could see additional pressure on Spain to consider using external funds for the bank recapitalisation,” he wrote.
Spain established a mechanism in February for using debt issued by the government or the bank-rescue fund, known as FROB, to recapitalise banks. Lenders can use governmentissued debt as collateral to borrow from the ECB. The FROB has ¤5bn of available funds, leaving its ability to bail out lenders dependent on Spain’s access to markets.
“It takes the ECB scam to a new level — not only has it become the lender of first resort for large parts of the euro-zone banking system but it is now also being abused as a source of capital,” Mr Grodzki said, referring to the possibility that the government may recapitalise Bankia’s parent company with its debt.
An ECB spokesman said in a phone interview that its “monetary policy framework operates as usual” and that it would refer questions on Bankia’s recapitalisation to authorities in Spain.
Foreign investors cut their holdings to 37% of Spain’s total outstanding debt in circulation in April, from 50% at the end of last year.
Domestic lenders, bolstered by emergency funding from the ECB, have picked up the slack, increasing their share to 29% from 17% over the same period. Bloomberg