MADRID—Spain will pump €19 billion ($24 billion) into troubled lender Bankia SA,BKIA.MC -7.43% the bank said Friday, effectively nationalizing the country’s third-largest bank in a dramatic effort to assuage concerns about the stability of its financial sector.
Worries about Spain’s banks, which are saddled with billions in toxic real-estate loans, have heightened in recent weeks as Greece’s political crisis has intensified and investors contemplate the knock-on effects of a potential Greek exit from the euro.
Sentiments darkened Friday as Standard & Poor’s cut its ratings on the credit-worthiness of Bankia and four other Spanish banks. S&P also revised its assessment of Spain’s economic risk, saying it believes the country is entering a double-dip recession that will lead to a large increase in troubled assets.
The news from Spain helped push the Dow Jones Industrial Average down 74.92 points, or 0.6%. Investors fled to the safety of U.S. Treasurys, sending the yield on the 10-year Treasury note to 1.740%, near its historic lows.
Though a capital injection for Bankia had been expected for days, the scale of the government’s action went beyond what most analysts had predicted. The bailout would be the largest in Spain’s history, doubling what Spain has so far spent to clean up a banking sector in the wake of the collapse of the country’s housing bubble.
Word of the move came late Friday after Europe’s markets closed, so it isn’t clear whether the government’s action will have the intended effect or simply harden doubts about the integrity of the country’s banking system.
Bankia’s Spain-wide operations and exposure to the country’s troubled property market have made it a barometer of the health of the entire Spanish banking system. Bankia has been a particular focus after the International Monetary Fund raised questions about its health in a recent report and it was forced to restate its earnings.
From the beginning of the Greek crisis almost three years ago, Europe’s leaders have worried about the contagion spreading to Spain. Due to Spain’s size and complexity, a bailout of the country would test the euro zone’s financial capacity and political cohesion like nothing before.
One worry is that the bigger-than-expected Bankia bailout could fuel speculation that more unrecognized problems may be lurking in other Spanish banks. That would raise questions over whether cash-strapped Madrid can handle such problems without the type of international intervention seen in Greece and Ireland.
Spain’s state-backed Fund for the Orderly Bank Restructuring has around €9 billion left to support ailing banks. A government spokeswoman said the so-called FROB can issue more debt, but Spain’s borrowing costs have spiraled higher at recent auctions, while demand has fallen.
Since its twin credit and housing booms turned to bust four years ago, leaving a bloated banking system saddled with more than one million unsold new homes, Spain has tried to hold down the price tag on the cleanup of its ailing banks, betting on a recovery that hasn’t come.
Taking a wait-and-see approach to its banks, Madrid has offered institutions incentives to merge and injected convertible debt into banks through successive cleanup plans. Just a few weeks ago, it presented its fourth cleanup plan in three years and said it thought it would cost the government just around €15 billion.
But uncertainty about the size of the sector’s total capital needs has been compounding Spain’s fiscal crisis, driving up the nation’s borrowing costs. The country has come under mounting pressure from its European Union peers and from international financial markets to push through a more muscular cleanup effort.
The Spanish government has tried to avoid following the same path as Ireland, which faced a similar housing crisis. In 2010, the Irish government backed a sweeping write-down of impaired assets and recapitalization of its banks, eventually forcing it into a €67.5 billion bailout from the EU and IMF. The terms of the bailout have hit the Irish population hard, forcing a degree of austerity that Spain has so far avoided.
Bankia—with Spain’s largest exposure to real-estate developers, the most toxic of Spanish assets—is viewed as the linchpin of the sector’s cleanup effort. Earlier this month, the government forced out the bank’s chairman and took control of Bankia by converting €4.5 billion worth of preferred stock in Bankia’s parent company, Banco Financiero y de Ahorros SA, into common shares. Through BFA, the government controls a 45% stake in Bankia, but that stake will rise significantly once the state injects more funds.
In a statement Friday, Bankia said its management had made the funding request, which it had “coordinated” with the government of Prime Minister Mariano Rajoy and the Spanish central bank. The bailout should get formal approval from the Spanish authorities in the coming days, people close to the situation said.
In parliamentary testimony earlier this week, Spanish Finance Minister Luis de Guindos said the government would give Bankia and parent, BFA, as much money as it needed.
BFA-Bankia was cobbled together two years ago from the merger of seven regional savings banks. The banking business was spun off into Bankia, which was listed in July of last year. Bankia’s shares were suspended from trading early Friday ahead of the board meeting. The stock has fallen 58% since its trading debut.
Friday’s effective nationalization for Bankia marks a stunning reversal from the bank’s initial public offering just 10 months ago. Bankia executives widely touted the bank’s shares to investors in Spain and abroad. But even then, many institutional investors had concerns about the bank’s structure and its holdings of devalued real estate, according to people who attended the presentations.
At the time, pulling off a successful IPO was seen as crucial in shoring up support for Spain’s beleaguered banking sector. Then-Prime Minister Jose Luis Rodriguez Zapatero even got involved, saying in parliament: “We want Bankia’s process to be a success.”
In its statement Friday, Bankia said it will set aside €12.75 billion to clean up its real-estate assets, which are the largest in the Spanish banking sector, totaling more than €50 billion including developer loans and foreclosed properties. Once this has been done, it said, the bank will have cash at hand to take a loss of 48.8% on this portfolio.
It also said it had dismissed 16 of its 18 directors and reduced its board to 10 directors. The bank also restated last year’s results to a loss of €2.98 billion, from a previously reported net profit of €309 million.
S&P downgraded its ratings on Bankia, as well as Banco Popular Español SAPOP.MC -2.16% and Bankinter SA, BKT.MC -0.78% to double-B-plus, one notch into junk territory, from triple-B-minus. It also downgraded Banca Civica SA BCIV.MC -1.66% to double-B, two notches into junk territory, from double-B-plus. It lowered its rating on BFA to B-plus, four notches into junk territory, from double-B-minus. It affirmed its ratings on nine other banks.
Hammered by concerns over Bankia, the S&P downgrade and an appeal for government financial assistance from the head of Spain’s Catalonia region, the country’s 10-year government bond yield, a key indicator of borrowing costs, rose 0.138 percentage point to 6.295%. A yield at this level is considered unsustainable in the long term.