Spain has announced an $11bn bailout for its troubled bank, Bankia, a month after nationalising it.
Luis de Guindos, the econmy minister, told a congressional committee that the state would have to put at least $11bn into saving Bankia, which he said would be fully nationalised in the process.
Losses at Bankia, Spain's fourth largest bank, have deepened investor fears that the fragile financial system could become more vulnerable as default rates rise in a recession.
Government sources, meanwhile, said de Guindos and other senior officials were at odds over how to help the country's 17 autonomous regions refinance $45bn in debt that comes due this year.
Bankia's new management team will undertake a complete assessment of the lender's capital needs and will present its plan in mid-June, de Guindos said.
The government will recapitalise Bankia's parent group BFA using the state-backed bank restructuring fund, the FROB, and then will fund Bankia through a capital increase including preferential shares for existing shareholders, the minister said.
The clean-up of Bankia and BFA, which account for 10 per cent of deposits in Spain, would take care of most of the problems in the country's banking system, he said.
Defending the rescue, Mariano Rajoy, Spain's prime minister, reiterated on Wednesday at the EU summit in Brussels that Spain would not seek external funds to bail out its banks.
"The government has no interest and no intention in accessing any funds from the European Union or any other organisation," he said following a meeting with France's president, Francois Hollande, on Wednesday.
The government has picked US investment bank Goldman Sachs to value Bankia. The consultancies Oliver Wyman and Roland Berger have been hired to audit other banks' loan books, with bad loans rising to their highest in 18 years.
A leading banking industry group, the Institute of International Finance (IIF), has said Spain's banks may need another $96bn to cover losses as bad debts might rise as high as $329bn.
Economists fear the number of Spaniards defaulting on their mortgages could rise given the country's recession-bound economy and sky-high unemployment of 24 per cent.
The Spanish benchmark 10-year bond traded at a 6.2 per cent yield on Wednesday, not far off the 7 per cent level that is seen as unsustainable for a country's finances.
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|Liaquat Ali Khan|