* State says will inject more capital in Bankia as needed
* Says Bankia solvent, continues normal operations
* More banking reforms coming Friday
* Bankia shares fall 3.52 pct, other bank shares jump
By Paul Day
MADRID, May 10 Hoping to put an end to a
four-year banking crisis, the Spanish government effectively
took over Bankia SA, one of the country's biggest
banks, late on Wednesday after days of market anxiety over the
The centre-right government of Prime Minister Mariano Rajoy
told Spaniards the banking sector was safe and said more
measures to strengthen ailing banks would be announced on Friday
after reforms introduced in February proved insufficient.
The pledges to reform the banks pulled Spanish stocks off
the nine-year low they hit a day earlier, with the blue-chip
index rebounding 3.66 percent on Thursday afternoon amid
heavy trade in top banks BBVA and Santander.
The sector has been through three major overhauls since a
building and property market crash in 2008, which has left
lenders with about 184 billion euros ($238 billion) in toxic
assets including repossessed housing complexes that stand empty.
Holding 10 percent of deposits in Spain's banking system,
Bankia is by far the largest of eight banks that the government
has rescued in recent years. It was formed in 2010 when the
government forced a number of savings banks into a merger to try
to save them.
"Bankia is a solvent entity that continues absolutely normal
operations and its clients and depositors have no cause for
concern," the central bank said in a statement.
Although other stocks were cheered by the Bankia rescue,
Bankia shares fell 3.57 percent to 2.054 euros by 1400 GMT.
Spain's country risk, as measured by the spread between
yields on its 10-year benchmark bond and the German benchmark,
eased slightly but held close to six-month highs
The state took complete control of Bankia's parent company
BFA by converting an earlier 4.5 billion euro rescue loan into
shares. That gives the government 45 percent of Bankia, but it
is expected to merge the two entities and control both.
The government is also expected to pump another 10 billion
euros of loans or cash into Bankia to cover the hole left by
Some experts criticised the piecemeal approach over the past
few months. An executive board member of the European Central
Bank said it was time to present "a complete strategy".
"So far the action was taken too much on a case by case
basis," Joerg Asmussen told the German financial daily
"This strategy must entail two things. First, an independent
assessment of the total assets of the banks to create trust from
the outside ... secondly, whether one wants to create a central
bad bank to outsource bad assets."
Most bank customers interviewed in Madrid said they had
accepted assurances their money was safe, but those holding
shares said they felt they had been duped into a bad deal.
Bankia's share price has fallen 45 percent since its debut.
Bankia's stock market launch last year was part of a
government push to capitalise Spanish banks and many investors
felt they were part of a patriotic drive. Bankia marketed its
shares intensively at retail branches.
"For the moment, I'm not worried. Bankia is too big for the
government to let it fall, so I don't see any reason to panic,"
said Jose Sanchez, 30, standing outside another bank where he
works. "The nationalisation seems like a political move to calm
Consumer groups criticised the government for ploughing
money into banks while cutting health and education spending to
try to trim the deficit to meet targets from the European Union.
"This company has spent years living like a vampire off the
state to escape from the crisis and, like the rest of the
sector, has no scruples as it evicts families unable to pay
their mortgages and cuts off loans to small companies," said
Facua, a consumer group.
For years banking analysts and critics have pushed Spain to
go further in recognising its banking troubles, which threaten
to undermine the euro currency zone if the rescue is so
expensive that it breaks Spain's public finances.
"Bankia has ended up in state hands because nobody accepted
the reality of its financial situation in time," said an
editorial in El Mundo newspaper, which is generally sympathetic
to the ruling People's Party.
Bankia's exposure to troubled real estate assets, including
loans at risk of default and repossessed properties from
bankrupt borrowers, is about 32 billion euros.
With the economy in its second recession since 2009 and one
in four workers jobless, banks face rising loan defaults beyond
those connected with the burst construction bubble.
The banks have also been unable to unload homes they have
repossessed from property developers and from individuals. Home
sales fell in March for the 13th consecutive month, official
data showed on Thursday.
A government source said Spain would demand on Friday that
banks set aside another 35 billion euros against loans to the
ailing building sector - above and beyond the 54 billion they
are already provisioning this year - raising the possibility
that more public cash will be needed to rescue the banks.
The government is also expected to outline a "bad bank" type
scheme to remove toxic assets from banks' books after looking at
models from Ireland and other countries.
Rajoy had insisted for months that no more public funds were
needed for the banks. But he had to make a U-turn as doubts
persisted about Bankia, with the International Monetary Fund
pointing to its vulnerability and auditors Deloitte declining to
sign off its 2011 accounts.
The government earlier this week forced out Bankia Chairman
Rodrigo Rato, a former economy minister from the ruling party,
and replaced him with Jose Ignacio Goirigolzarri, a prominent
ex-banker from the Basque region.