European banking officials have called Spain’s €19 billion bailout of struggling Bankia “unacceptable”.
The ECB said the “backdoor bailout” of the bank was not the solution and a proper capital injection was needed for the bank to survive, reported the Financial Times.
The Spanish plan had been to inject 19 billion euros into the banks’ parent firm in bonds which would then be swapped for cash at the ECB’c three-month refinancing window. This money was in addition to a previous 4.5 billion euro package the bank has already received making a total bailout of €23.5 billion, so far.
ECB officials also pointed out that the plan could breach an EU ban on ‘monetary financing’ although policymaker Ewald Nowotny said it is “up to national governments to help banks.”
The comments from the ECB will not help an embattled Spain whose borrowing costs have soared recently and are approaching 7%.
On Monday the risk premium demanded by investors to hold Spain’s 10-year bonds reached its highest since the Euro was launched.
Spanish Foreign minister Jose Manuel Garcia-Margallo said Spain would take care of billions of euros of toxic assets left over from the real estate bubble in 2008 without international help.
However, analysts fear the move could damage the country’s liquidity and worsen the country’s public finances which are already under scrutiny from investors and EU officials. It could also damage the ability of the state to finance itself.
Miguel Angel Fernandez Ordonez, governor of the Bank of Spain, announced yesterday that he intends to step down on June 10, one month earlier than the end of his mandate.
Prime Minister Mariano Rajoy also reiterated his comments that Spain’s government does not need outside financial help, although most economists disagree.
“The point about Spain is it’s going to need some external support of some form,” said David Owen, chief European financial economist at Jefferies.