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Spectre of bailout looms as banking turbulence goes on

Another big swing in share prices shows the uncertainty is far from over, with some fearing Spain could go the way of Ireland

Further indications of the ultra-volatile future facing Spain's banking sector emerged yesterday when shares in the country's fourth-largest lender, the part-nationalised Bankia, bounced back abruptly with an increase of nigh-on 26 per cent during early trading.

The dramatic upturn followed a 28 per cent fall in share prices on Thursday amidst rumours of a mass run on Bankia, with withdrawals of up to €1bn by creditors. And the financial gloom already surrounding Spain darkened further when the credit-rating agency Moody's downgraded 16 Spanish banks, as well as Santander UK, by between one and three notches.

"We're going through an extremely turbulent period," Bankia's president Jose Ignacio Goirigolzarri told Efe TV.

Bankia's unexpected upswing, coupled with surges in price for all three of Spain's top banks – Santander, BBVA and La Caixa – eased pressure on the Madrid market's Ibex-35 index of top shares, which rose by nearly 1 per cent by midday. However shares in Bankia are well below their price when it first floated last summer: €1.79 compared to €3.75 in July 2011.

The newspaper Expansion reported that Goldman Sachs has been contracted for an audit of Bankia's shares. It was estimated last year that Bankia had problematic property assets of nearly €32bn, and the proportion of toxic bank loans stood at 8.37 per cent in March.

The aim of the audits is to calm investors worried that Spanish banks are not revealing the full extent of bad debts. But not everybody is convinced they will work. "Bankia is a metaphor for the Spanish economic crisis," the economist Miguel Jimenez wrote in El Pais. "It carries with it the injuries of the collapse of the property bubble, the recession and unemployment."

"Spain is becoming like Ireland –where bank problems caused a bail-out. There came a moment when the banks' financial problems were too big."

The Spanish government believes otherwise, with the Treasury Minister Inigo Fernandez de Mesa telling the BBC that runs on the banks were "a scenario I do not contemplate. The Spanish banks have plenty of liquidity."

Portugal, meanwhile has come up with an original answer for discouraging bailouts – on Thursday it announced that managers of any banks seeking public funds will have their salaries slashed by 50 per cent.

Whilst the party is definitely over for Spain's banking sector, what little fiesta spirit might have lingered in the celebration-loving country suffered another blow yesterday. Both an outdoor concert by Daniel Barenboim in August as well as Madrid's popular White Night – where museums, galleries and other public buildings put on free concerts and exhibitions – have been cancelled.

"It was either that or [not] open a library" explained Fernando Villalonga, the capital's arts director. "We can't afford everything." Spain's bankers may have the same feeling.

UK savers withdraw Santander cash

Santander UK, the country's third-largest bank in terms of savers, saw £200m taken out despite reassuring customers the downgrading of its and its parent group's debt ratings should not make them panic.

The money taken out, however, was less than 0.2 per cent of its £150bn deposit base. "There are no queues reported at our branches anywhere," said a spokesman. The bank said the UK business could not send money back to its Spanish parent without the express go-ahead from the Financial Services Authority in London. The credit ratings agency Moody's cut Santander UK's rating one notch to A2, but left it one point higher than the Spanish parent's score of A3. The bank said UK customers were covered by the Financial Services Compensation Scheme.