Shares in Spain's Bankia suspended

Madrid - Shares in Spain’s fourth-biggest lender Bankia SA were suspended on the Madrid stock exchange on Friday, ahead of an evening announcement when the bank is expected to ask the state for a rescue of more than €15bn.

The government is in the process of nationalising Bankia, which holds some 10% of the country’s bank deposits, after it was unable to raise enough capital to cover heavy losses from loans to property developers during a building boom that crashed in 2007-2008.

Bankia and other banks exposed to the property bust are seen as a major risk for Spain and for the entire euro currency zone, because of concerns that the government will end up having to ask for international aid to prop up lenders.

Earlier this week Economy Minister Luis de Guindos told a congressional committee that the state would have to put at least €9bn into Bankia to cover losses on sour loans and repossessed housing.

The government has already spent €4.5bn to prop up Bankia and the entire rescue is now seen totalling some €20bn.

The figure has risen several times in recent months. Some weeks ago de Guindos pledged that no public money would be put into the banks.

Spain will have to go to the markets to raise debt to put into Bankia, at a time when its borrowing costs are high.

Spain's country risk, as measured by the spread between benchmark German and Spanish bond yields, jumped as high as 500 basis points in recent weeks. On Friday it had moderated to 462 basis points as investors moved out of German debt to hunt for higher yields.

Money to rescue Spain’s savings banks, many of which were used by politicians to fund pet projects such as massive cultural centres and airports, is a sensitive subject at a time when the government is slashing spending on schools and hospitals to meet strict European deficit reduction targets.

Additional spending

While struggling to put a precise number on a banking sector clean-up, Spain has also revised its 2011 deficit figure several times as additional spending from regional and local governments has come to light.

A Treasury source told Reuters on Thursday that adjustments to 2011 town hall accounts could mean another change, up or down, to the overall public deficit last year, which currently stands at 8.9% of gross domestic product (GDP), almost 3 percentage points higher than the target.

The conservative government of Prime Minister Mariano Rajoy plans more than €45bn in savings this year to try to bring the deficit down to 5.3% of GDP, a mission many say is impossible.

Spain has gone through four different stages of rescues of its banks, none of which has completely convinced investors that the clean-up has been deep enough.

Now it may end up creating one nationalised bank out of its failed lenders, including Bankia, if the state cannot find buyers for state-rescued banks like mid-sized Catalunya Caixa.

Under pressure from the European Union, the government has hired independent auditors to produce a report on the financial system. International institutions such as the European Central Bank and International Monetary Fund will scrutinise the audit to give it credibility.

Some market watchers said a big figure for Bankia's rescue may be better than a figure that will turn out to be too small.

“The idea is that the €15bn would cover all current funding needs and any more that might pop up, reassuring the market that there won’t be any more surprise announcements,” said Sonia Tardio, a sales trader for Madrid brokerage Renta4.

Ratings agency S&P could cut the credit rating of some Spanish banks on Friday, Banesto said in a research note. The agency said in April that by the end of May it would conclude a review of Spanish banks on creditwatch.

Bankia shares have fallen 34% since its former Chairman Rodrigo Rato stepped down on May 7, in a prelude to the state intervention in the bank.