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FINANCIAL CRISIS

Bankia’s new chairman proposes lender's partial nationalization

State would convert a 4.464-billion-euro loan into shares for a controlling interest

Prime Minister due on Friday to announce further reforms to the banking system

The new chairman of Bankia, José Ignacio Goirigolzarri, will propose the partial nationalization of its parent company Banco Financiero y de Ahorro (BFA), which is floundering under the weight of its exposure to the ailing real estate sector, financial sector sources said Wednesday.

The operation will be carried out by converting a loan of 4.464 billion euros granted to BFA by the state´s Orderly bank Restructuring Fund (FROB) into shares, which will give the government control both of BFA and its commercial banking arm Bankia, the country’s fourth-biggest lender with over 10 million customers and assets of over 340 billion euros.

BFA is currently fully controlled by Caja Madrid, Bancaja and the other five savings banks, or cajas, which merged to form it. BFA is Bankia’s largest shareholder with a 45.3-percent stake and currently acts as its so-called “bad bank” in that it holds the real estate assets of the group. The Bank of Spain and the government believe BFA might need between seven and 10 billion euros to clean up its balance sheet. Bankia currently has capital of 3.5 billion euros.

Goirigolzarri was named chairman of Bankia by its board on Wednesday after former Economy Minister Rodrigo Rato had resigned on Monday when it became apparent that the government was poised to intervene. Goirigolzarri, a former CEO of BBVA bank, was expected to be also ratified later Wednesday as the new top official by Bankia’s board. His proposal for the state to take a controlling stake in BFA requires the approval of its directors as well as that of the FROB, which operates under the auspices of the Bank of Spain. It will then require the go-ahead from the European Commission.

The state’s intervention will give Goirigolzarri a free hand in naming a different board for BFA, whose current make-up includes politicians and labor union representatives. The option of converting the FROB loan into capital will avoid the government having to pump more of taxpayers’ money into the bank to clean it up.

We know what has to be done and we’re going to do it,” said Rajoy

Prime Minister Mariano Rajoy is due on Friday to announce further reforms to the banking system as a whole. Speaking at news conference after a summit meeting in Porto, Rajoy said: “The decisions we will take on Friday and before will move in the right direction. We know what has to be done and we’re going to do it.”

The measures are expected to include requiring banks to make further provisions for potential losses from real estate assets. There is also the possibility that the government will announce the creation of a real estate company into which those assets would be folded, allowing the banks to clean up their balance sheets.

The government’s decision to backtrack on its avowal not to inject further public funds into the banks came in response to a growing lack of confidence by investors of the Spanish banking system, which has been forced to borrow record amounts from the European Central bank.

Spain’s country risk premium hit its high for the year at over 450 basis points on Wednesday, while bank shares plunged led by Bankia.

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