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Categorized | Banks, Economy

Spain gives Bankia urgent cash boost

Posted on August 31, 2012

Spain has been forced to inject emergency liquidity into Bankia after the nationalised lender announced a €4.4bn loss for the first six months of the year.

Spain’s state bank rescue fund, the Frob, said on Friday that it would provide capital to Bankia before the arrival of €100bn in European rescue money requested in June, but which has still not been provided by Brussels.

    The Frob did not specify how much it would inject into the bank, which had earlier said it needed €19.5bn in new capital in what will be Spain’s largest bank nationalisation.

    The move came as the government of Mariano Rajoy announced the fifth attempt at reforming its banking sector in only three years, giving the state the power to close failing lenders and establishing a “bad bank” as Madrid implements the conditions imposed under the terms of its European bank bailout.

    Hailed as “the authentic reform” by Luis de Guindos, finance minister, the new proposals will allow the government for the first time to intervene before a bank gets into difficulty, and to liquidate banks judged as unviable.

    A property management company for soured real estate assets, or “bad bank”, will also be created to allow lenders to rid themselves of the burden of repossessed homes.

    Investors in bank preference shares and subordinated debt will be forced to take losses before any state aid can be given to financial institutions.

    Many small savers were sold savings products linked to preference shares by Spain’s four now nationalised banks, and under the reform they will be offered by lenders the market value of their shares, which often trade at less than half their original value.

    “If we had had instruments like these before, this banking crisis could have been addressed in a different way, but we must now look to the future,” said Mr de Guindos, adding that the reform had been drawn up in consultation with the European Central Bank and the International Monetary Fund.

    With mounting concern at the possibility of a rescue, a further €55.6bn of capital left Spain in June, following a €41.3bn outflow in May, according to data released by the Bank of Spain, taking the total outflow for the year past €200bn.

    The government has failed to gain the confidence of the international investors Spain needs to lend it money, with high borrowing costs and a shrinking economy raising expectations that it will be forced to accept a full-scale rescue later this year – with further conditions attached.

    The Eurogroup of eurozone finance ministers welcomed the recapitalisation of Bankia on Friday, “pending the full recapitalisation and restructuring process which is ongoing under the terms of the financial assistance programme”.

    Mr de Guindos said the “bad bank” would last for a period of between 10 and 15 years, and predicted that it would make a profit by the end of its life to avoid taxpayers backstopping more of the sectors’ losses.

    The capital for the new entity would come from the Frob, with only a small part from the bailout money, Mr de Guindos said, with a plan to sell some of the shares in the bad bank to private investors in the future.

    Spain was forced to accept conditions on the oversight and regulation of its banks, and new austerity measures, as a result of its June request for €100bn in European aid to clean up a banking sector saddled with €180bn of bad property loans after a decade-long housing bubble.