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


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.


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.


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.


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.


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


people Emma Watson addresses celebrity nude photo leak
Katie Hopkins appearing on 'This Morning' after she purposefully put on 4 stone.
peopleKatie Hopkins breaks down in tears over weight gain challenge
Boris Johnson may be manoeuvring to succeed David Cameron
peopleHis band Survivor was due to resume touring this month
ebooksAn unforgettable anthology of contemporary reportage
people'It can last and it's terrifying'
In this photo illustration a school student eats a hamburger as part of his lunch which was brought from a fast food shop near his school, on October 5, 2005 in London, England. The British government has announced plans to remove junk food from school lunches. From September 2006, food that is high in fat, sugar or salt will be banned from meals and removed from vending machines in schools across England. The move comes in response to a campaign by celebrity TV chef Jamie Oliver to improve school meals.
Arts and Entertainment
Life and Style
fashionModel of the moment shoots for first time with catwalk veteran
Life and Style
fashionPart of 'best-selling' Demeter scent range
Tom Cleverley
footballLoan move comes 17 hours after close of transfer window
Alexis Sanchez, Radamel Falcao, Diego Costa and Mario Balotelli
footballRadamel Falcao and Diego Costa head record £835m influx
Life and Style
fashionAngelina Jolie's wedding dressed revealed
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs General

Science Teacher Urgently required for October start

£6720 - £33600 per annum: Randstad Education Nottingham: We are currently recr...

ICT Teacher

£120 - £130 per day: Randstad Education Group: We are looking for an outstandi...

Art & Design Teacher

£120 - £130 per day: Randstad Education Group: We are looking for an outstandi...

Assistant Management Accountant -S/West London - £30k - £35k

£30000 - £35000 per annum: Ashdown Group: We are working with an exciting orga...

Day In a Page

'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering