Spain said it would take over Bankia SA and may inject public funds into the banking group with the most Spanish real estate as the government prepares the fourth attempt to overhaul the financial system.
Spain’s bank bailout fund will convert its 4.5 billion euros ($5.8 billion) of preferred shares in Bankia’s parent, Banco Financiero y de Ahorros, into voting shares, the Economy Ministry said in a statement yesterday. That will give it a controlling stake of 45 percent in Bankia, the ministry said, adding the government will provide the capital that’s “strictly necessary” to clean up the lender.
The takeover adds momentum to Prime Minister Mariano Rajoy’s drive to shore up Spain’s financial system as concerns about possible hidden losses on banks’ books push up the government’s borrowing costs. The announcement came two days after Bankia Chairman Rodrigo Rato said he would step down, to be replaced by Jose Ignacio Goirigolzarri, a former second-in-command at Banco Bilbao Vizcaya Argentaria SA.
“This is a de facto nationalization of Bankia -- the news is really quite shocking,” Mauro Guillen, a professor of international management at the Wharton School at the University of Pennsylvania in Philadelphia, said in a phone interview. “The new guy from BBVA now comes in with the full backing of the government to carry out his strategy.”
Bankia fell as much as 3.8 percent, and was down 3.6 percent at 2.05 euros by 3:10 p.m. in Madrid, taking the decline since its initial public offering in July to 45 percent. Spain’s Ibex 35 share index rose 2 percent.
As concern over how Spain will finance a cleanup of its banking system stokes a resurgence of the sovereign debt crisis, Rajoy said he will tomorrow outline his plan to bolster confidence in the industry.
The gap in yield between Spanish 10-year bonds and German bunds grew yesterday to the widest since November. Spain’s 10-year bond yield declined to 6.04 percent today from 6.08 percent yesterday.
Rato was asked to quit because of the economic situation, the ruling People’s Party’s deputy leader Maria Dolores de Cospedal said today. Bankia group has about 300 billion euros of assets, about a third of the size of the economy, making it crucial to the government’s bid to convince investors it can shore up lenders without endangering public finances.
The new management must present “as soon as possible” a strengthened restructuring plan and the lender should “consider the contribution of public funds to accelerate and increase its cleanup,” the Bank of Spain said yesterday.
The conversion means BFA won’t have to buy back the preferred shares, which carry an annual interest rate of 7.75 percent, in 2015 as originally planned. Those securities were acquired by rescue-fund FROB in 2010 in a first attempt by Spain to bolster a banking industry reeling from the property collapse. Two other efforts followed, most recently in February.
Until now, BFA has been controlled by 300-year-old Caja Madrid and six other savings banks that combined in 2010 to create the Bankia group under Rato’s leadership.
The nationalization will erase the stakes held by the savings banks, which were traditionally linked to regional administrations and dedicated part of their profit to social and cultural projects. A priest, Francisco Piquer, founded Caja Madrid in 1702 using alms to fund loans for the destitute and masses for the dead.
“What’s most positive is the elimination of the influence of the savings banks by taking over BFA,” said Alberto Recarte, who served on Caja Madrid’s board for 18 years. “Now it’s just the state that’s in charge. The time of the savings banks has gone forever.”
The Bank of Spain, which hailed Bankia’s IPO in July as “very positive,” came in for criticism today. Josep Duran i Lleida, parliamentary chief of the Catalan party and a Rajoy ally, said Governor Miguel Angel Fernandez Ordonez hadn’t paid enough attention to supervision, eroding the regulator’s prestige.
The European Union is discussing the bailout of Bankia with the Spanish authorities, Antoine Colombani, spokesman for EU Competition Commissioner Joaquin Almunia, told reporters today in Brussels.