CNBC | MAY 29, 2012
Spanish 10-year borrowing costs neared the 7 percent danger level and Bankia shares hit record lows on Monday after the government, struggling to sort out its finances, proposed putting sovereign debt into the struggling lender.
Prime Minister Mariano Rajoy pinned the blame for the rising borrowing costs—the spread over Germany reached the highest since the euro’s launch—on concern about the future of the single currency.
He again ruled out seeking outside aid to revive a banking sector laid low by a property boom that has long since bust.
“There are major doubts over the euro zone and that makes the risk premium for some countries very high. That’s why it would be a very good idea to deliver a clear message there’s no going back for the euro,” Rajoy told a news conference. “There will not be any (European) rescue for the Spanish banking system.”
He gave no details of bank recapitalisation plans but backed calls for the euro zone bailout fund, which will be in place from July, to be able to lend to banks direct.
Government sources told Reuters Spain may shore up Bankia with sovereign bonds in return for shares in the bank and could use this method to prop up other troubled lenders—moves which would push the country’s debts above the 79.8 percent of economic output which had been expected this year.
“This method has been used by Germany and by Ireland in the past, it is perfectly valid,” a government source told Reuters.
The source said the ECB had not been specifically informed of the plans to inject state bonds into Bankia. A final decision had not yet been made on which option to take.
Bankia’s parent company BFA has asked for 19 billion euros ($23.8 billion) in government help, in addition to 4.5 billion the state has already pumped in to cover possible losses on repossessed property, loans and investments.
Investors increasingly believe weak banks, undermined by the collapse four years ago of a decade-long property boom, coupled with heavily indebted regions, could force Spain to seek an international bailout which the euro zone can barely afford.