Spanish Credit Risk Surges to Record on Bankia ‘Zombie’ Peril

The cost of insuring against a Spanish default surged to a record on concern a bailout of Bankia SA (BKIA), the nation’s third-biggest lender, won’t fend off a banking crisis triggered by bad real estate loans.

“While there is no danger of an imminent collapse at Bankia, there is a risk that it becomes a zombie bank, which has to rely on the European Central Bank to fund it over the long term,” said Roger Francis, an analyst at Mizuho International Plc in London.

There is growing speculation Spain may become the fourth European nation to seek a rescue as its lenders become overwhelmed by 184 billion euros ($239 billion) of what the nation’s central bank terms “problematic” assets linked to property. Of the 38 billion euros of real estate the Bankia group held at the end of 2011, about half was classed as either “doubtful” or at risk of becoming so, according to the lender’s annual report.

Credit-default swaps insuring Spanish government debt rose 18.5 basis points to 517.25 basis points a 12:55 p.m. in London, according to data compiled by Bloomberg. Spanish 10-year government bonds extended a decline, pushing the yield on the securities above 6 percent for the first time since April 27. The yield climbed 17 basis points, or 0.17 percentage points, to 6.02 percent.

Swaps on Valencia-based Bankia climbed nine basis points to 721 while contracts on Banco Santander SA (SAN), the largest Spanish lender, increased 15.5 basis points to 411 and Banco Bilbao Vizcaya Argentaria SA (BBVA), the second biggest, was up 19 basis points to 446.

Bad Loans

Bad loans as a percentage of total lending in the Spanish banking industry hit 8.16 percent in February, the highest level in 18 years, according to Bank of Spain data. Bankia Chairman Rodrigo Rato said May 7 he was resigning as head of the banking group to be replaced by BBVA’s former second-in-command, Jose Ignacio Goirigolzarri, as the government weighs a second bailout of the lender with the biggest Spanish asset base.

The Bankia group, formed in 2010 from a merger of seven savings banks led by Caja Madrid and Valencia-based Bancaja, last year listed its banking business on the stock exchange after parking its worst real estate assets in the parent company.

European Union President Herman Van Rompuy said today he has “full confidence” in Spain to implement economic reforms and that the government in Madrid has not requested financial aid.

Sovereign Index

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments jumped 7.5 basis points to 282.5. A basis point on a swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Contracts insuring Italy’s debt rose 18 basis points to 463, the highest since April 23, while contracts on France increased 7.5 basis points to 211. Belgian swaps climbed eight basis points to 252 and Germany jumped five basis points to 90.5, the highest since Jan. 30.

The cost of insuring corporate debt also climbed with contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbing 21.5 basis points to 698.5. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased six basis points to 156.75 basis points.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers was up 13 basis points at 268 and the subordinated index was 19 higher at 429.

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