The Spanish government will use billions of euros in public money to bailout the country’s fourth largest bank Bankia if it deems it necessary, said Prime Minister Mariano Rajoy on Monday, who had previously insisted that no additional state money would be used to clean up the country’s banking sector.
Speaking in a radio interview with Onda Cero radio, Rajoy confirmed the Spanish government was preparing an intervention for Bankia, though he would not say exactly how much funds would be needed.
"If it was necessary to reactivate credit, to save the Spanish financial system, I would not rule out injecting public funds, like all European countries have done," he said, as cited by the Financial Times.
Bankia was one of the hardest-hit banks by the Spanish real estate collapse, after inheriting an estimated 30 billion euro ($40 billion) in toxic assets. The bank was formed in 2010 with the merger of seven troubled entities – including leading savings bank Caja Madrid – and is said to have strong ties to the ruling centre right party of Rajoy.
Subsequently, Rajoy’s announcement was followed hours later by the resignation of Bankia’s executive chairman Rodrigo Rato, which appears to have cleared the way for a rescue plan.
Rato, an ex-IMF chief and a former minister, gave no reason for his departure apart from saying that he had finished his task of restructuring the bank and had plans to hand over power to former BBVA chief executive Jose Ignacio Goirigolzarri.
Last month, the IMF singled out Bankia as the largest risk to the stability of the Spanish banking sector. Following Rato’s announcement, shares in Bankia slid by 3.6 percent on Monday.
Leading Spanish daily El Pais now estimate that Bankia will need between 5-10 billion euros ($6.5-13 billion) to repair its balance sheet. Business daily Expansion put the figure at 5-7 billion euros.
"Without the state taking over the losses, the banks' balance sheets will not be cleaned up. If you create bad banks, someone must assume the risks," said Konrad Becker from the German private bank Merck Finck to Deutsche Presse-Agentur.
A bail-out from the Spanish government would need to be substantial or risk achieving little, added an adviser to Spanish banks to FT, who requested anonymity.
"Just injecting capital would be the equivalent of rearranging the deck chairs on the Titanic. I think Spain has not admitted to itself just how weak some of its banks actually are and how serious the situation is."