Spain announced a 9-billion-euro ($11 billion) bailout for troubled lender Bankia on Wednesday, while also seeking ways to help its highly indebted regions meet huge refinancing needs that threaten to drag the country deeper into the eurozone crisis.
The country's weak banks and overspending regions are at the heart of the European debt crisis due to concerns that expensive bail-outs of ailing lenders and regions could force the country to seek international aid.
Losses at Bankia, Spain's fourth largest bank, are central to investor fears that the fragile financial system could become more vulnerable as default rates rise in a recession.
Economy Minister Luis de Guindos told a congressional committee that the state would have to put at least 9 billion euros into saving Bankia, which he said would be fully nationalised in the process.
At the same time government sources said de Guindos and other top officials were at odds over how to help the country's 17 autonomous regions refinance 36 billion euros in debt that comes due this year.
Bankia's new management team will undertake a complete assessment of the lender's capital needs and will present its plan in mid-June, de Guindos said.
The government will recapitalise Bankia's parent group BFA using the state-backed bank restructuring fund, the FROB, and then will fund Bankia through a capital increase including preferential shares for existing shareholders, he said.
He said the Bankia rescue would include 7.1 billion euros in provisions for losses from bad loans and 1.9 billion euros in capital buffers, as well as address issues flagged by Bankia's auditors.
The clean-up of Bankia and BFA, which account for 10 percent of deposits in Spain, would take care of most of the problems in the country's banking system, he said.
"I insist BFA-Bankia is a specific case and it's not correct to extrapolate its problems to the rest of the Spanish financial system," he told lawmakers.
Bankia is the most exposed of Spain's banks to losses stemming from a 2008 property crash. But economists said the focus had now moved on the banking sector as a whole.
"The market has moved beyond Bankia. How much Bankia will get in aid is not going to make a big difference," said Martin van Vliet, senior economist at ING.
"The question is now about the long-term solvency of parts of Spain's banking system, especially what is going to happen with mortgage loan default. This concern is not being addressed."
NO EXTERNAL AID
Prime Minister Mariano Rajoy reiterated on Wednesday that Spain would not seek external funds to bail out its banks.
"The government has no interest and no intention in accessing any funds from the European Union or any other organisation," Rajoy said following a meeting with French Prime Minister Francois Hollande on Wednesday.
The government has picked Goldman Sachs to value Bankia and consultancies Oliver Wyman and Roland Berger were hired to audit other banks' loan books, as bad loans have risen to their highest in 18 years.
Spain has chosen outside auditors to reassure investors and European Union leaders, who were meeting at a summit on Wednesday, that Madrid has the situation under control.
A leading banking industry group, the Institute of International Finance (IIF), has said Spain's banks could need another 76 billion euros to cover losses as bad debts might rise as high as 260 billion euros.
Economists fear the number of Spaniards defaulting on their mortgages could rise given the country's recession-bound economy and sky-high unemployment of 24 percent.
The Spanish benchmark 10-year bond traded at a 6.2 percent yield on Wednesday, not far off the 7 percent level that is seen as unsustainable for a country's finances.
New budget plans from Spain's 17 autonomous communities revealed that they have 28 billion euros of bank loans coming due this year, along with 8 billion euros of bonds that mature in 2012.
Many of the autonomous regions are virtually blocked from financing themselves on public debt markets due to the high rates they would have to pay. Some have seen the credit rating on their debt cut to junk status.
Spain's government last week admitted its 2011 public deficit was higher than it had previously reported after three regions revealed higher spending last year than they had earlier reported.
Two government sources said the central administration now aimed to put forward a new mechanism to back regions' debt as soon as early June.
But, the sources said, de Guindos and Treasury Minister Cristobal Montoro disagreed on the final form the new instrument should take.
De Guindos favours a centralised mechanism which would control and issue debt for the regions. Montoro would rather see a less intrusive instrument which would fall under the umbrella of his ministry, possibly based on credit lines from the central government to regions which meet their deficit targets. ($1 = 0.7838 euros)
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