Spain Weighs Injecting Debt Instead of Cash Into Bankia

Spain is considering injecting debt issued by the government or its bank-rescue fund instead of cash into the Bankia group, using a mechanism that would free it from raising the money from investors. The shares fell.

The government hasn’t made a decision on whether to use its debt to recapitalize the nationalized lender and will decide in two or three months, a spokesman for the Economy Ministry, who asked not to be named in line with its policy, said in a phone interview today. Spanish newspaper El Pais reported the plan to use government debt yesterday.
Bankia shares fell as much as 29 percent in Madrid and traded 13 percent lower at 1.37 euros at 1 p.m.

Spain nationalized the Bankia group on May 9, leading the lender with the biggest Spanish asset base to request 19 billion euros ($23.9 billion) of government backing to clean up lending to property developers and other loans such as residential mortgages. The size of the support needed for Bankia, and the implication that other banks may also need state support to repair their balance sheets, pushed 10-year yields today to the most relative to German bunds since the euro was created.

Spain established a mechanism in February for using debt issued by the government or the bank-rescue fund, known as FROB, to recapitalize banks. Lenders can use government-issued debt as collateral to borrow from the European Central Bank.