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FINANCIAL TURMOIL

Spain’s risk premium touches new euro-era high

Banks start to take on board need for European bailout

Spain’s risk premium hit yet another new euro-era high on Friday as doubts about the full extent of the banking sector’s problems continued to unhinge investors after the nationalization of Bankia and its request for the biggest bailout ever in Spanish banking history.

The spread between the yield on the Spanish 10-year government bond and the German equivalent touched 547 basis points in Friday’s session after opening at 534. It closed Friday at 535 basis points.

Economy Minister Luis de Guindos said late Thursday that the crunch time had arrived for both Spain and Italy, which would decide where the euro zone was going. “The future of the euro will be played out in the next few weeks in Italy and Spain,” the minister said, in what was a clear call to Germany to reverse its opposition to measures that have been proposed to stabilize the situation.

De Guindos said the only way to prevent the break-up of the single-currency bloc was to move toward a “banking union” in Europe that would allow the direct injection of funds into banks. The European Commission on Wednesday defended this idea but Germany remains opposed. However, the current rules of European rescue funds require governments to apply for help for their banks.

Although this would have a political cost for the government, some of Spain’s banks are coming around to the idea of seeking a bailout.

“I believe we should not stigmatize this European rescue fund because the government is going to take a stake in Bankia issuing 19 billion euros in debt with a risk premium that at this moment has gone through the roof,” the chairwoman of medium-sized bank Bankinter, María Dolores Dancausa, said in an interview with state broadcaster RTVE. “If the figures needed are much higher, I believe there will be no other remedy [other than to tap the rescue fund],” she added.

De Guindos had initially estimated Bankia’s funding needs to clean up its balance sheet at about 7 billion euros on top of the 4.4-billion-euro loan the government plans to convert into common shares.

The chairman of Banco Sabadell, Josep Oliu, on Thursday also suggested that the government should consider seeking European funding to clean up the banking system.

Rodrigo Rato, who resigned as chairman of Bankia just before the government’s decision to nationalize the bank, defended his stewardship of Spain’s fourth-biggest lender.

Rato, who remains as chairman of Caja Madrid, one of seven savings banks that merged to form Bankia, said the huge losses recorded by Bankia and its parent company, Banco Financiero y de Ahorros (BFA), last year were only accounting losses taken on board as a result of the increased provisioning requirements imposed by the government.

“The capitalization plan will leave the group in a magnificent financial situation since it involves a terrific injection of funds in order for the company to increase its provisions significantly,” Rato said. “But unfortunately this will be at the cost of public funds [two percent of GDP], and will do serious harm to the current shareholders of Bankia as a result of dilution, which will bring about a massive fall in its share price,” he added.

The leader of the main opposition Socialist Party, Alfredo Pérez Rubalcaba, was equally critical of the government’s handling of Bankia. Echoing remarks Thursday by the European Central Bank President Mario Draghi, Rubalcaba said: “With Bankia, it couldn’t have been done worse.”

The Socialist leader called for the whole process of Bankia’s nationalization to be amended and called on the Bank of Spain to go over its books for last year, rather than calling in external auditors as the government plans.