Investors fled Spain’s sovereign debt on Monday as a record rescue appeal by Bankia sparked fears of a financial sector rescue too big to handle without an international bailout.
Bankia’s request for 19 billion euros ($24 billion) in state funds shook the markets and raised concerns over the entire financial sector as reports circulated that other banks need another 30 billion euros.
The big question in the markets is: Where will Spain find the money to pump into its banks?
If the state finds itself unable to raise the cash on the financial markets, investors fear that despite denials, Spain ̶ the eurozone’s fourth-biggest economy ̶ may be forced to go cap in hand to Brussels.
In response to this, Spain’s sovereign debt risk premium ̶ the extra return investors demand over safe German government debt ̶ shot to a euro-era record of 509 basis points in morning trading.
Meanwhile, distressed Bankia’s shares dived by as much as 29 percent in early trade. The rest of the sector suffered, too, including even the eurozone’s largest bank by market value, Santander.
Bankia’s board met on Friday and requested the biggest bailout in Spanish banking history, in addition to a 4.465-billion-euro capital injection made earlier this month.
Altogether, the cost to the state for rescuing of Bankia, which has the largest exposure to Spain’s collapsed real estate sector, amounts to an unprecedented 23.5 billion euros.
Now, “even if we knew what to do, we still need to decide on how to finance it,” analysts at Link Securities said in a report. “It is this question that will keep investors on alert in the coming days.”
Until now, the state-backed Fund for Orderly Bank Restructuring (FROB) has raised finances in the debt markets and then transferred the money into troubled banks.
But the FROB has only 5.4 billion euros. Of this, one billion has already been committed to the Banco de Valencia which was recently taken over, Bankinter analysts said.
In this context, Bankinter said, the government was considering injecting newly issued government bonds into Bankia's parent Banco Financiero y de Ahorros (BFA), thus avoiding the strains of borrowing on the markets.
Bankia could then use the government bonds as collateral to borrow on the interbank market or from the European Central Bank, or it could even sell them on the open market.
This would not prevent Spain’s debt from rising above Madrid’s end-2012 target of 79.8 percent of gross domestic product.
“As a last resort, there is a possibility it would have to go to the European Financial Stability Facility,” said Juan Jose Toribio, professor at Madrid’s IESE business school.
According to center-right daily El Mundo, the costs to the state could have to inject another 30 billion euros in public funds into three other troubled banks that it has taken over: CatalunyaCaixa, NovacaixaGalicia and Banco de Valencia.
That would bring the total bill to more than 50 billion euros, a sum large enough to sow doubts about Spain’s capacity to pay up at a time when it is struggling to trim its budget under the close watch of the markets and the European Union.
If the risk premium remains at high levels, “Spain could ask for help from the European Financial Stability Facility,” a government official was quoted as telling El Mundo.
“It is a possibility, although now every hypothesis is possible,” the source reportedly said.
Spain could even ask for help directly from the International Monetary Fund, the paper said.
A spokeswoman at the Economy Ministry told AFP that the government’s policy of not requesting outside aid, “has not changed.”