Investors flee Spanish debt amid bank bailout fears

Spanish prime minister, Mariano Rajoy Spanish prime minister, Mariano Rajoy has admitted the state is struggling to borrow, as its risk premium hit a Euro-era record and fears spread over the country's stricken banks .
Rajoy sought Monday to calm investors after the distressed lender Bankia pleaded for the biggest state rescue in Spanish history.
But Spain's sovereign debt risk premium - the extra return investors demand to hold Spanish bonds over their safer German counterparts - lept to a Euro-era record of 514 basis points.
"With a risk premium at 500 points, it is very difficult to raise finances," Rajoy told a news conference.
He played down the repercussions of the Bankia situation, saying it would have no impact on efforts to trim the public deficit and denying that it had undermined confidence in Spanish sovereign debt.
The prime minister reiterated his government's line that it will not seek a foreign bailout.
But Bankia's request Friday for 19 billion Euros ($24 billion) in state funds nevertheless raised concerns over the entire sector as reports circulated that other banks could need another 30 billion Euros.
On the Madrid stock exchange, the IBEX-35 index slid 2.17 percent to 6,401.20 points, its lowest close in nine years.
Bankia slumped 13.38 percent, Banco Popular fell 7.50 percent and CaixaBank dropped 5.09 percent. Santander, the biggest in the Eurozone by market value, tumbled 3.23 percent and number-two BBVA declined 3.39 percent.
"Far from calming the debt markets and share prices, Rajoy's words accelerated the drop in bank prices and failed to dispel doubts about where the money is coming from to be injected into Bankia," said Daniel Pingarron, analyst at brokerage IG Markets.
If the state finds itself unable to raise the cash on the financial markets, investors fear that, despite the denials, the Eurozone's fourth largest economy may be forced to go cap in hand to Brussels.
Bankia's board met Friday and requested the bailout. When taken together with a 4.465-billion-Euro capital injection made earlier this month, the total bill would be an unprecedented 23.5 billion Euros.
Underlining the parlous state of the bank's finances, its parent Banco Financiero y de Ahorros (BFA) announced consolidated losses of more than 3.3 billion Euros ($4.1 billion) for 2011.
BFA, which previously estimated much lower losses, was born from a merger of seven institutions last year, amid pressure from Madrid for wide-scale restructuring of the troubled sector.
The parent bank owns 52 percent of Bankia.
Until now, the state-backed Fund for Orderly Bank Restructuring (FROB) has raised finance in the debt markets and then transferred the money into troubled banks.
But the FROB only has 5.4 billion Euros, of which one billion has already been committed to Banco de Valencia, which was recently taken over by the state, Bankinter analysts said in a report.
"We are studying two options," an economy ministry spokeswoman told AFP.
"The first is our preferred option, which is to go to the market," raising funds for Bankia with a bond issue, she said.
The second option would be to inject government bonds directly into the bank, the spokeswoman said. The bank could use the bonds as collateral to raise liquidity with the European Central Bank or sell them, she explained.
This, however, would not prevent Spain's debt from rising above Madrid's end-2012 target of 79.8 percent of gross domestic product.
"The idea of such a debt/equity swap for Bankia looks clever, or is it too clever," wondered Berenberg Bank chief economist Holger Schmieding.
"The key issue is whether such a debt-equity swap would do enough to bolster public trust in Spanish banks and thus safeguard their deposit base," he added.
According to centre-right daily El Mundo, the state might have to inject another 30 billion Euros in public funds into three other banks it has taken over: CatalunyaCaixa, NovacaixaGalicia and Banco de Valencia.
That would bring the total bill to more than 50 billion Euros, enough to sow doubts about Spain's capacity to pay up at a time when it is struggling to trim its budget deficit.
Concerns about spending by Spain's powerful regions are also weighing on sentiment.
Catalonia president Artur Mas called Friday for the central government to approve the use of "hispanobonos" jointly issued by the regions and guaranteed by the state. His region alone faces debt payments, including refinancing costs, of 13.48 billion Euros in 2012.