Winnipeg Free Press - PRINT EDITION

Spanish bank seeks government bailout

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MADRID, Spain -- Spain's troubled bank, Bankia, asked the Spanish government for 19 billion euros (US$23.8 billion) in financial support on Friday, the day a leading credit rating agency downgraded it to junk status.

Jose Ignacio Goirigolzarri, the bank's president, said late Friday the bailout would "reinforce the solvency, liquidity and solidity of the bank."

The request came as Standard & Poor's downgraded Bankia and four other Spanish banks to junk status because of uncertainty over restructuring and recapitalization plans.

Trading in Bankia shares was suspended Friday while its board determined how much new aid was needed. The bank's shares have experienced turbulent trading in recent weeks on fears it would not be able to cover the massive losses it has built up in bad loans to the country's collapsed real estate sector.

Concern about the health of Europe's banks is a key constituent of the region's financial crisis. Spanish banks are seen as particularly shaky because they were heavily exposed to the country's collapsed real estate bubble and now hold massive amounts of soured investments, such as defaulted mortgage loans or devalued property. Bankia has been the worst-hit and holds 32 billion euros ($40 billion) in such toxic assets.

Bankia S.A. was created from the merger of seven regional banks, or cajas, that were deemed too weak to stand alone. But financial concerns continued to plague it -- its shares have lost almost half their value since the lender went public last July.

The government decided to intervene earlier this month, effectively nationalizing Bankia, and injected 4.5 billion euros ($5.7 billion) in aid.

Its shares closed at 1.6 euros ($2.01) on Thursday after shedding more than seven per cent.

The Spanish government is trying to shore up the banking sector to get credit flowing to the ailing economy. But the cost of rescuing banks could overwhelm government finances, which are strained by a recession and an unemployment rate of nearly 25 per cent.

The possibility the Spanish government might eventually need an international rescue package -- such as the ones Greece, Ireland and Portugal sought -- has kept investors on edge for months.

Spanish Prime Minister Mariano Rajoy met with Socialist opposition leader Alfredo Pérez Rubalcaba late Friday to try to map out a strategy for the future.

The big fear is if Greece eventually leaves the euro, confidence in other financially weak countries such as Spain and Italy could fall, causing the value of their bonds to drop. Ultimately, the worry is that could undermine confidence in the system and create bank runs.

-- The Associated Press

Republished from the Winnipeg Free Press print edition May 26, 2012 B11

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