Spain proposes €19bn capital injection for Bankia

Spain’s government is considering proposals to inject €19bn of capital in the form of government debt into Bankia, one of the country largest banks by assets, according to non-confirmed government sources.

The capital would be used as collateral to receive additional money from the European Central bank (ECB), asking the institution to support the domestic banking sector. Plans to recapitalise the bank are expected to be signed in June.

Bankia was nationalised at the beginning of May, when the state took 45% stake in the bank to cover its exposure to toxic property assets.

“The proposed €19bn capital injection into Bankia shows two things: the problems in the Spanish banking sector are much more pronounced than the government had admitted so far, and Spain is getting serious about tackling the issue,” said Bill Hubard, chief economist at Markets.com.

According to the economist, one collateral benefit of the Greek troubles is that under pressure, Spain is now dealing with its banking problems much more seriously.

“In a similar vein, Catalonia’s request last Friday for support from Spain’s federal government can help Madrid in its attempt to ‘rein in’ regional fiscal deficits. As Spain has already passed its labour market reform, the banks and the regions are the key items left on Madrid’s to-do list,” he said.

He added that the idea of a debt/equity swap for Bankia looks “clever”, as Bankia would get government bonds, the government would take an ownership stake of up to 90% and even if Spain’s gross public debt would go up, the country would not have to issue new bonds into the market.

“As Spain would own the bank, it would also de facto pay the interest on these bonds to itself. This way, Spain may even avoid having to tap the European rescue fund to recapitalise its banks. If the ECB allows this, banks could pledge these government bonds as collateral to access the ECB for liquidity. Of course, the key issue is whether such a debt-equity swap would do enough to bolster public trust in Spanish banks and thus safeguard their deposit base,” Hubard said.

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