17 May 2012

Concerns grow over future of Spanish bank

The Spanish government denies that customers have withdrawn one billion euros from their accounts after shares in Spanish bank Bankia fall 25 per cent on Thursday as worries mount over its future.

The firm, made up of seven rescued Spanish banks has been part-nationalised by the country’s government. On Thursday Spanish Economy Secretary Fernando Jimenez Latorre denied media reports that customers had taken more than 1bn euros ($1.3bn; £800m) out of the bank over the past week. His assurances helped the bank’s shares recoup some of the earlier heavy losses, but the concern over the european banking system saw British banks shares sliding, with Royal Bank of Scotland shares down by as much as four per cent in London.

But back in Spain, the Bankia share price was not the government’s biggest problem. On the bond markets it had to pay sharply higher rates of interest to borrow money – an indication of growing concern among lenders about a country’s ability to pay the money back.

In total, the Spanish government raised 2.5bn euros (£2bn) through issuing a number of different types of bonds. On bonds due to be paid back in January 2015, it had to pay an interest rate of 4.373%, up from 2.89% in April.

Bad debt provision

Spain’s Prime Minister Mariano Rajoy warned on Wednesday that borrowing costs could become “astronomical” as fears grow about the strength of its banks.

On the same day, Bankia said it was delaying the release of its first quarter results. The bank reported only provisional results for the first quarter, without figures for net profit or bad debt provision. It said more information would be forthcoming “once we have the definitive annual accounts for 2011 and the audit report on them,”.

Bankia is already setting aside 4.7bn euros, the highest among Spain’s banks, to cover loans that could go bad.

Spain is one of the eurozone countries scrambling to introduce cost-cutting measures, while almost one quarter of the workforce is currently unemployed.

High Spanish unemployment

More than half of 18-25-year-olds seeking work in Spain do not have a job.

Elsewhere in the eurozone, Cyprus’s Popular Bank has revealed the country’s government is underwriting its issue of 1.8bn euros of new shares to help shore up its future.

The bank, the second largest in Cyprus, was heavily exposed to Greek debt and made losses of 3.65bn euros in 2011 as a result.