Spain races to bail out bank as debt fears stalk Europe

Euro plunges as Bankia shares are suspended

Spain's economic crisis intensified yesterday as Madrid prepared to pump at least €15bn (£12bn) into the country's fourth-biggest bank, sending the euro plunging on a fresh day of turmoil for the eurozone.

Shares in Bankia, which has already been propped up by the Spanish taxpayer, were suspended on the Madrid stock exchange ahead of the move. Spain's cost of borrowing on international money markets also soared as Catalonia – the country's wealthiest region – said it may need a handout from the central government to pay its bills.

Last night, in another blow to the embattled nation, the Standard and Poor's ratings agency downgraded the credit ratings of five Spanish lenders including Bankia, which, along with Banco Popular Español and Bankinter, was cut to junk.

The latest crisis comes against a backdrop of alarm over a possible Greek exit from the single currency, a prospect which has sent tremors through global stock markets this week. Yesterday, the euro fell below $1.25 to a fresh 22-month low against the dollar and also lost ground against the pound.

As well as Bankia's bailout in Spain, Greece's four biggest lenders were also in line for an €18bn capital injection under the terms of its €130bn rescue. Even Scandinavia's much stronger banks were under the spotlight as the ratings agency Moody's cut its credit ratings on three of the biggest players in Norway and Sweden, citing the potential impact of the debt crisis on their access to funding.

Fund managers have caught fright at the increasing risk of contagion in the eurozone ahead of a possible Greek exit, and are rushing to dump euro assets. This week's inconclusive Brussels summit did little to inspire confidence and Citigroup analysts warn that the euro could even fall to parity with the dollar.

Markets remained jittery yesterday despite reports that Angela Merkel, the German Chancellor, was drawing up a plan to boost Greece and protect the eurozone. Der Spiegel magazine said Germany was working on proposals that included special economic zones in troubled countries to attract investment.

Meanwhile, Madrid is in the process of nationalising Bankia, which holds some 10 per cent of Spain's bank deposits, after it was unable to raise enough capital to cover heavy losses from loans to property developers. Spain has made several unsuccessful attempts to tackle the banking sector's €300bn exposure to a property boom in 2007-08.

With €184bn of these loans said to be "problematic" by Spain's central bank, the scale of the crisis is such that investors fear Prime Minister Mariano Rajoy's centre-right government will have to ask for international aid to prop up its lenders. The nation has, meanwhile, slumped back into recession as Mr Rajoy looks to slash €45bn from the budget to bring down the deficit.

Madrid has demanded that the banks set aside an extra €84bn in provisions for property losses this year as well as spinning off bad debts into separate asset management companies. The government has already spent €4.5bn to prop up Bankia and the entire rescue now totals some €20bn. Michael Symonds, an analyst at Daiwa Capital Markets Europe, warned Bankia was the "tip of the iceberg" and criticised Spain for taking a "piecemeal approach". He warned: "Our view is that if Greece leaves the euro and contagion spreads to Spain and Italy, no amount of capital will be adequate."

Spain will have to go to the markets to raise debt to put into Bankia at a time when its borrowing costs are heading towards unsustainable levels. But its job was made even harder yesterday after the warning from Catalonia – which accounts for a fifth of the Spanish economy – that it was running out of options over refinancing €13bn of debt falling due this year.

The Catalan President Artur Mas said: "We need to make payments at the end of the month. Your economy can't recover if you can't pay your bills." The prospect of yet more borrowing by Spain sent its 10-year borrowing costs up to 6.27 per cent, back towards the 7 per cent level seen as the trigger for a bailout.

The debt burden of Spain's 17 devolved regions – alongside the bad loans of its banks – could stretch finances to breaking point. All of the regions together have €36bn in debt to refinance this year, as well as an authorised deficit of €15bn. Last year, many of the regions financed debt by falling months or even years behind in payments to service providers such as street cleaners.

Greece's central bank chief, George Provopoulos, said extra funds for his country's biggest banks were "important in a period of great uncertainty".

Moody's cut its ratings on Sweden's Nordea and Handelsbanken, and Norway's DNB, by one notch, despite healthy economic growth and some of Europe's strongest capital buffers.

€184bn ‘Problematic’ loans made by Spanish banks to fund 2007-08 property bubble

Struggling banks: A Europe-wide problem

Spain

The dependence of Spanish banks on the ECB for funding has ballooned in the past year, rising from €43.8bn (£35.1bn) in April 2011 to a mammoth €316.9bn last month.

Italy

Moody's has cut its ratings on 26 of Italy's biggest banks as its economy faces a third quarter of recession and austerity measures.

France

In Paris, the big concern is the exposure of French lenders to peripheral eurozone nations – $491.4bn (£313.6bn) to Italy, Spain and Greece as of the end of 2011, according to the Bank for International Settlements.

Portugal

Following last year's bailout, Portugal's banks are still largely frozen out of money markets and borrowed €55.4bn from the ECB in April.

Scandinavia

Though stronger, banks in Sweden and Norway suffered credit ratings cuts yesterday, partly owing to the European debt crisis.

 

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Guru Careers: Software Developer

£30 - 35k + Benefits: Guru Careers: We are seeking a Software Developer (JavaS...

Guru Careers: Software Engineer / Software Developer

£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

Ashdown Group: Trainee Consultant - Surrey/ South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before