Shares in Spain's Bankia plunge on bailout plan

(AP) MADRID - Concern over troubled Spanish lender Bankia and the government's ability to come up with the 19 billion euro ($23.8 billion) bailout the bank needs to bolster its defenses sent the nationalized lender's stock price plummeting and Spain's borrowing costs soaring Monday.

Shares in Bankia fell 28 per cent on opening in Madrid on Monday - the bank's first day back on the stock exchange following its announcement Friday that it would need a bigger bailout than expected to shore itself up against its bad loans. The shares, which recovered slightly by midday to trade 14 percent down, had closed at 1.57 euro before trading was suspended Friday.

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Bankia S.A. has been one of the banks hardest hit by Spain's real estate collapse over the past four years. It is estimated to have 32 billion euro in toxic assets and was effectively nationalized earlier this month when the government converted 4.5 billion euro in rescue funds it gave last June into shares.

Among the chief concerns surrounding Bankia's request for state aid - the largest in Spanish history - is just how Spain plans to fund it. The country's borrowing costs have risen sharply over the past few weeks. On Monday, the interest rate, or yield, for 10-year bonds on the secondary market - a key indicator of market confidence - was up 13 basis points by midday to 6.42 percent.

A rate of 7 percent is considered unsustainable over the long term and there is concern that Spain might soon be pushed join the ranks of Greece, Ireland and Portugal and seek an international bailout.

Bank of Spain estimates show Spain's banks are sitting on some 180 billion euro ($233 billion) in assets that could cause them losses. The government fears the cost of rescuing the country's vulnerable banks could overwhelm its finances, which are already strained by a double-dip recession and an unemployment rate of nearly 25 percent, and force it to seek a rescue by the rest of Europe.

With the cost of borrowing so high, the government is considering an unconventional technique pay for the Bankia bailout that would avoid the capital markets.

An economy ministry official confirmed news reports that the government is considering injecting government debt into Bankia's accounts. The bank could then turn to the European Central Bank and use those bonds as collateral to receive cash for the recapitalization.

The official spoke on condition of anonymity in keeping with ministry policy.

However, analysts said that such a technique would only prove to investors that the country is having difficulties raising money on the international debt markets and would therefore make them even more reluctant to buy Spanish debt.

"It sends a signal of a lack of confidence," said Mark Miller of Capital Economics in London.

"It probably is self-perpetuating. It is a Catch-22 situation, but of course that's true of the Spanish economy anyway at the moment," he said.

Oscar Moreno of Madrid brokerage Renta4 said the government has little choice: Either use this uncommon technique or simply ask the European Union for money to bail out the banking sector - which Prime Minister Mariano Rajoy has vehemently ruled out as unnecessary.

Moreno said the idea of the government doing this - which risks spooking investors and raising borrowing costs anyway - is not exactly good news.

"To say things are complicated is to put it gently," Moreno said.

Moreno said Bankia's share price drop - and the rising bond yield - showed investors sees the Spanish banking sector's woes just getting worse. Only last week, for instance, Economy Minister Luis de Guindos said the government would inject about 9 billion euro into Bankia.

"Basically, what the investor sees is that, with what has emerged with Bankia, more money is going to be needed than what was originally stated" in two government decrees ordering banks to put aside a total of some 80 billion euro in provisions to cushion against losses from real estate, Moreno added.

Concern about the health of Europe's banks is a key constituent of the region's financial crisis. While Spanish banks suffer mainly from soured real estate investments, they and their counterparts across Europe also hold massive amounts of shaky government bonds. As the financial crisis worsens, those bonds lose value, hurting the banks.

The big fear is that if Greece eventually leaves the euro, confidence in other financially weak countries like Spain and Italy could fall, causing the value of their bonds to drop. Ultimately, the worry is that could undermine confidence in the system and create bank runs.

To avert such a disastrous scenario, financial experts are increasingly calling for a Europe-wide support system for the banks.