Markets suffer Black Monday as Bankia shares plummet

The shares of distressed bank Bankia plunged on Monday after its request for a massive bailout, while Spain’s risk premium hit yet new euro-era highs. But Prime Minister Mariano Rajoy ruled out the need for a rescue package for the Spanish banking system

Bankia on Friday asked the government for 19 billion euros in aid on top of the 4.465 billion euros in preference shares lent to Bankia’s parent Banco Fiancuiero y de Ahorros (BFA) that the Orderly Bank Restructuring Fund (FROB) is already converting into common stock, which will give the government control of both BFA and Bankia.

The total rescue package of 23.5 billion euros is by far the biggest bailout in Spain. Despite that and calls from some within his own Popular Party to do so, Rajoy has ruled out calling in the former management of Bankia — and that of the management of the seven savings banks that merged to form it — to appear before Congress to explain the reasons for the bank’s problems, which stem largely from its exposure to the ailing real estate sector.

One PP leader said Rajoy is focused on bringing down the risk premium and “does not want more problems than the essential one.”

Bankia’s shares closed down 13.38 percent at 1.360 euros after having fallen by almost 30 percent at one point in the session. Trading in Bankia was suspended on Friday. Some analysts valued Bankia at only between 0.20 and 0.30 euros. Deutsche Bank has priced it at 0.50 euros and Mediabanca at 1.0 euros.

On the trading floor, Bankia pulled the rest of the banking sector down with it. Santander lost 3.23 percent and BBVA 3.39 percent. The blue-chip Ibex 35 was down 2.17 percent at 6,401.20 points

Once the bank has been cleaned up, it will be sold and the state will get back its investment”

Concerns about the banks and their exposure to Spanish government debt pushed the risk premium above 513 basis points. Rajoy insisted that the spike in the premium was not a result of the decisions taken regarding BFA-Bankia.

Bankia also restated its 2011 financial results to show a loss of 2.979 billion euros. In February, it had reported a profit of 309 million. BFA is expected to announce the largest ever loss by a Spanish bank.

Rajoy on Monday reiterated his call for Europe to move to guarantee the sustainability of debt issued by euro-zone members and of the currency itself, but insisted at a news conference that: “There will be no bailout of the Spanish banking system.”

The Popular Party leader said he was confident the 23.5 billion euros being injected into BFA-Bankia would be recovered. “Once the bank has been cleaned up, as the leading financial institution in Spain, it will be sold and the state will get back its investment,” Rajoy said.

He said the alternative to state intervention was letting the bank go bankrupt.

EL PAÍS on Sunday published that the government plans to inject state aid into BFA-Bankia directly in the form of government bonds to avoid having to tap the market. This could mean a debt issue of between 50 and 60 billion euros. Bankia already holds between 40 and 50 billion euros in government debt. Reuters quoted government sources as saying that the administration has informed the European Central Bank of this decision, which the ECB is in favor of.

However, Rajoy denied that the ECB had been contacted, insisting that the means of recapitalizing Bankia had not yet been decided.

Asked if he was in favor of modifying the European Stability Mechanism to allow banks to directly tap the bailout fund without going through their governments, Rajoy said: “There are people in favor of that. I certainly am.”