A senior finance ministry official said Spanish authorities are preparing a cleanup plan for Bankia and its parent company, Banco Financiero y de Ahorros SA. Local daily, El País, said the government could inject up to €10 billion in the troubled lender. A Bankia spokesman declined to comment.
The cleanup of Bankia has long been seen as the acid test of Spain's resolve to put its financial house in order. The Madrid-based lender has one of the industry's largest exposures to Spanish real-estate developers, with €37.52 billion in loans to the sector, €17.85 billion of which are considered problematic.
The government's plans were disclosed shortly before the resignation of Bankia Chairman, Rodrigo Rato, on Monday. Mr Rato, a former Spanish finance minister and managing director of the International Monetary Fund, didn't give a reason for his departure. He said he was stepping down after overseeing the tie-up of seven institutions that merged to form Bankia, the country's fourth-largest bank by market value.
Analysts have long speculated that the government and the Bank of Spain have been pressuring Bankia into a merger with a stronger peer. Mr Rato had denied the pressures, but had said he intended to keep Bankia independent. Mr Rato couldn't be reached for comment.
The finance ministry official said the government also plans to approve at its Friday cabinet meeting guidelines for banks to remove impaired real-estate assets from their balance sheets and place them in separate vehicles that the government hopes will be largely financed by private investors. The official said public funds could be necessary to make the plan work.
The state-backed Fund for Orderly Bank Restructuring has €9.9 billion on hand to invest. Though in theory the FROB could raise more money through debt issuance if needed, existing market conditions could make that difficult, forcing Spain to turn to the European bailout facilities for assistance. Spanish officials have so far ruled out that possibility.
The government has already forced Spanish banks to set aside a big chunk of earnings to cover potential losses on loans to real-estate developers and foreclosed properties. The segregation of toxic assets is something that has been recommended by the IMF, and is seen as key to completing the cleanup and calming investors.
The weakness of Spain's banks is weighing on an economy that contracted 0.3 per cent in the first and fourth quarters, meeting most economists' definition of a recession. Banks have sharply reined in credit in the face of growing bad debts and problems getting financing on international markets.
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