MADRID-Spain may re­cap­i­talise Bankia with Span­ish gov­ern­ment bonds in re­turn for shares in the bank which last week asked for res­cue fund­ing of US$24 bil­lion, a gov­ern­ment source told Reuters yes­ter­day. Bankia could use the sov­er­eign pa­per as col­lat­er­al to get cash from the Eu­ro­pean Cen­tral Bank, forc­ing the ECB to get in­volved with re­struc­tur­ing Spain's bank­ing sec­tor, laid low by lend­ing to prop­er­ty de­vel­op­ers in a boom that end­ed in 2008.

Bankia's pres­i­dent Jose Igna­cio Goirigolzarri said ear­li­er that the bank would treat the US$29.5 bil­lion in state aid it will re­ceive in the coun­try's biggest-ever bank bailout as an in­vest­ment meant to make a prof­it for the Span­ish gov­ern­ment and not as a loan. In an AP re­port, Goirigolzarri ap­peared to be try­ing to re­as­sure mar­kets af­ter the Span­ish me­dia ques­tioned what he had meant by say­ing on Sat­ur­day: "We don't need to talk about giv­ing any of it back."

In a state­ment yes­ter­day, he said Bankia's oblig­a­tion is "not to re­turn that cap­i­tal but to be able to gen­er­ate val­ue and prof­itabil­i­ty for that con­tri­bu­tion." Goirigolzarri said the Span­ish state would de­cide "when it deems ap­pro­pri­ate, and through the mech­a­nism it choos­es," when to sell its stake in Bankia to ob­tain the high­est pos­si­ble price to ben­e­fit tax­pay­ers.

Bankia is stuck with US$40 bil­lion in tox­ic as­sets on its books from loans in the prop­er­ty sec­tor be­fore Spain's re­al es­tate bub­ble burst. The Bank of Spain has es­ti­mat­ed that the coun­try's banks are sit­ting on some US$233 bil­lion in as­sets that could cause them loss­es.

The gov­ern­ment fears the cost of res­cu­ing the coun­try's vul­ner­a­ble banks could over­whelm its fi­nances, which are al­ready strained by a dou­ble-dip re­ces­sion and an un­em­ploy­ment rate of near­ly 25 per cent, and force it to seek a res­cue by the rest of Eu­rope-al­ready pre­oc­cu­pied by cri­sis-hit Greece. Cur­rent­ly the gov­ern­ment is en­dur­ing high in­ter­est rates on Spain's bench­mark ten-year bond, which was at 6.29 per cent Fri­day.

Any­thing above sev­en per cent is con­sid­ered un­sus­tain­able in the long run. A few weeks ago, the con­ser­v­a­tive gov­ern­ment of Prime Min­is­ter Mar­i­ano Ra­joy was main­tain­ing it felt con­fi­dent there would be no need to in­ject more pub­lic mon­ey in­to Span­ish banks.

Even at this month's NA­TO sum­mit in Chica­go, Ra­joy dis­missed com­ments from the new French Pres­i­dent Fran­cois Hol­lande that Spain's banks might need mon­ey from Eu­ro­pean re­cap­i­tal­i­sa­tion funds to stay in busi­ness. Now the Span­ish gov­ern­ment is un­der pres­sure to en­sure that the coun­try's sec­ond-largest mort­gage lender has enough cap­i­tal to go for­ward and hopes this cap­i­tal in­jec­tion will calm mar­kets that made Bankia shares ex­pe­ri­ence tur­bu­lent trad­ing re­cent­ly.

Some an­a­lysts have been re­as­sured by the re­cap­i­tal­i­sa­tion plans Goirigolzarri set out at his news con­fer­ence Sat­ur­day. "Bankia ceas­es to be a con­cern; now the ac­counts are very clear and its cap­i­tal re­quire­ments are very clear," said an­a­lyst Manuel Es­cud­ero of the Deusto Busi­ness School. So far, the Bank of Spain has agreed to in­ject Bankia with US$5.7 bil­lion in res­cue funds in June. This will be fol­lowed in Ju­ly by &eu­ro;19 bil­lion in state re­cap­i­tal­i­sa­tion, Goirigolzarri said.

AP