MADRID (MNI) – Spain’s government, under pressure from the European
Commission, is preparing to invest E7 billion to rescue troubled banking
group BFA-Bankia, a move that will give Madrid a majority stake in the
country’s fourth largest private financial institution, according to
Spanish press reports.

The partial nationalization is “imminent” and could come as early
as the end of business Wednesday, according to some reports, and on
Friday according to others.

The daily ABC reported that the government of Prime Minister
Mariano Rajoy will also convert to equity capital the E4.465 billion
already injected into the group by Spain’s bank restructuring fund
FROB. The money from FROB carries a stiff interest rate that was
inflicting losses on BFA (Banco Financiero y de Ahorros). The money was
intended to support the merger of the seven savings banks, or “cajas”,
that make up the group.

According to elconfidencial.com, a Spanish financial news website,
the government decided to act because of an equity shortfall of E20
billion at the group, which was the reason why auditor Deloitte refused
to sign the BFA’s accounts — and which in turn led to the resignation
this week of Bankia president Rodrigo Rato, the former managing director
of the International Monetary Fund.

The government’s decision to use public funds in what amounts to
Spain’s largest-ever bank rescue, came just after Finance
Minister Luis de Guindos met last Thursday with Olli Rehn, the European
Commission’s vice president for economic and monetary affairs, according
to the same website.

It said that Guindos had used the meeting with Rehn to discuss how
best to obtain the funding for a second round of measures for the
country’s financial sector, in the face of market pressure for Spain to
seek aid from the European Financial Stability Facility (EFSF). That
option was discarded in favor of “issuing more debt,” the site reported.

After the nationalization of BFA-Bankia, Rajoy’s government plans
to give it a long period of stabilization, after which other private
sector financial institutions will be invited to invest in the group,
either in minority or majority capacity. Spanish banks BBVA, Santander
and La Caixa could be interested in such an investment, according to
elconfidencial.com.

According to cotalizia.com, another financial website, retail
investors in BFA-Bankia have been panicking this week. In the past week,
small investors have sold more than E3.24 billion worth of shares in the
banking group, it reported.

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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