Contagion fears escalate as Spanish government takes over Bankia

The Spanish government has taken control over Bankia SA, one of the country’s biggest banks by assets.

The takeover comes via a deal converting an earlier €4.7bn rescue loan into ordinary shares, which gives the government control over 45% of the bank.

The government is now expected to complete an extra €10bn injection of loans or cash to cover losses caused by bad property loans in the bank’s portfolio.

Bankia was formed in 2010 following the merger of seven Spanish savings banks (cajas) and has already received more than €4bn in government aid. it is the largest of the eight Spanish banks that the government rescued in recent years.

The deal is still subject to the approval of the Bank of Spain.

“Bankia is a solvent entity that continues to operate on an absolutely normal footing. Its customers and depositors have no cause for concern,” the Bank said in a statement.

Meanwhile, Jose Ignacio Goirigolzarri, former chief executive of rival bank BBVA, has replaced Rodrigo Rato as chief executive of Bankia, following his resignation on 7 May.

The possibility of Bankia’s nationalisation emerged at the end of last week, when press reports claimed the Spanish government was discussing a bail-out plan to save the bank – which is reported to have a €32bn exposure to toxic real estate assets, including loans at risk of default and repossessed properties from bankrupt borrowers.

Fears continue around the Spanish banking sector’s overall exposure to toxic real estate assets.

“At the end of 2011, Spanish banks had taken €108bn bad loan provisions against their real estate assets. At the behest of the government this is currently being increased to €160bn, which compares with €180bn of real estate loans the government deems as problematic,” said Barry Norris, manager of the Ignis Argonaut European Alpha Fund.

Norris added that it is difficult to accurately gauge an overall figure for provisions which would provide comfort for financial markets given likely further economic deterioration, or how these provisions would be funded given concerns over the government’s solvency and the context of pre-provision profits of the Spanish banking system of just €30bn per annum.

 

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