FINANCIAL CRISIS

Bankia denies run on deposits as lender's shares plunge

Treasury’s borrowing costs rise sharply in bond auction as risk premium remains high

Shares of Bankia, the Spanish bank that was partly nationalized last week, went into free fall on Thursday on reports of a run on the bank’s deposits that was subsequently quashed both by the lender and the government.

Bankia’s shares closed down 14.08 percent at 1.422 euros after having fallen 11.12 percent the previous session. At one point Bankia was down by as much as 29 percent in Thursday’s session. The shares are some 60 percent off their listing price in July of last year of 3.75 euros.

The blue-chip Ibex 35 closed down 1.1 percent at 6,537.90 points.

In a statement submitted to the National Securities Commission (CNMC), Bankia said the pattern of its deposits in the first two weeks of May was of a “substantially seasonal nature,” adding that it is confident that the balance of its deposits will not undergo “substantial changes” over the next few days.

“Bankia’s depositors can rest absolutely assured about the safety of their savings,” the bank’s chairman, José Ignacio Goirigolzarri, said. The secretary of state for the economy, Fernando Jiménez Latorre also ruled out the possibility of a run on the bank.

Bankia has lost over half its market capitalization since Rodrigo Rato resigned as chairman of Spain’s fourth-biggest lender in terms of market capitalization. The former IMF managing director’s departure was followed days later by the government’s decision to take a controlling stake in Bankia’s parent Banco Financiero y de Ahorro (BFA), which effectively also gives it control of Bankia.

BFA reported a profit of 40.9 million euros last year and Bankia earnings of 304.7 million, but the bank’s auditor declined to give its stamp to the results, which are to be restated, in all likelihood presenting a much grimmer picture of the bank’s financial situation.

BFA is heavily exposed to the real estate sector, which has been in a dire slump since around the start of 2008. The government has required the country’s banks to significantly increase their coverage for possible losses from their real estate related assets, which will eat into lenders’ earnings, possibly causing some of them to post losses and cut off dividend payments.

Bankia shareholders’ woes on Thursday coincided with an auction of Treasury bonds in which the government’s debt management arm was obliged to sharply increase the yields offered. Spain’s risk premium climbed eight basis points to 490 basis points after hitting a new euro-era high of 507 basis points on Wednesday.

Latorre suggested the European Central bank should step in to help relieve the pressure on Spain’s sovereign debt.

“We understand we are doing everything necessary in terms of fiscal adjustment policy and structural reforms, and we understand there should be a little bit of reaction from the European Central Bank.

The National Statistics Institute on Thursday also confirmed that Spain slipped back into recession at the start of this year for the second time in three years as GDP declined 0.3 percent in the first quarter.

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