EU urges Spain to spell out Bankia rescue

(MADRID) - The European Union pressed Spain on Thursday to urgently clear up doubts over its mammoth rescue of stricken lender Bankia so as to calm markets fearing a financial breakdown.

As investors exited Spanish bonds and stocks, the bloc called on Madrid to provide details of its bailout of Bankia.

Bankia is asking the state for 19 billion euros ($24 billion) to repair its books, in addition to 4.5 billion euros already injected, the biggest rescue in Spanish banking history.

"What we need from the Spanish government is for it to communicate the restructuring plan for Bankia and the options it is considering to restructure and if possible recapitalise," said EU spokesman Amadeu Altafaj.

"We will then study it to see if is fulfills conditions for public aid," Altafaj, who is spokesman for EU economics commissioner Olli Rehn, told public broadcaster Radio Nacional de Espana.

The rate on 10-year government bonds hit 6.68100 percent, only a little down from six-month highs hit the day before and still at levels regarded as unsustainable over the longer term.

The extra premium over safe-bet German bonds spiked to 5.41 percentage points, matching the previous day's euro-era record, before easing to a still-punishing 5.19 percentage points.

"We cannot keep up this uncertainty which is weighing on confidence in the markets," Altafaj added.

"No-one can expect that with these negative results from some banking entities the markets are going to react with euphoria. So the sooner we eliminate uncertainties the better."

Although the European Union had a rescue mechanism, any use of it would require negotiating a bailout of the Spanish economy, even if it was focused on only one sector, the EU spokesman said.

Despite some calls for Europe to intervene directly in troubled banks, existing treaties did not allow it and "in the Spanish case it is not relevant," he said.

"If it is possible to raise the funds through market mechanisms or through actions by the Spanish government, that is better than resorting to a rescue, which has negative connotations," he warned.

Economy Minister Luis de Guindos said this week the state-backed Fund for Orderly Bank Restructuring (FROB) would issue bonds and inject capital as needed into Bankia.

But his plan sowed doubts on the market because of the exorbitant rates charged on Spanish debt.

A report in business daily Cinco Dias said the government was considering recapitalising Bankia in stages, progressively pumping in capital as it needs liquidity so as to avoid the expense of a single rescue.

That would also give the European Union time to agree on a possible rescue, it said.

Both Madrid and the International Monetary Fund denied they were discussing a rescue loan for Spain as Deputy Prime Minister Soraya Saenz de Santamaria prepared to meet with Fund chief Christine Lagarde.

"My desire is to not come out and deny these rumours because they are senseless," De Guindos told an economic conference in the resort town of Sitges late on Thursday.

The government this month instructed banks to set aside an extra 30 billion euros in 2012 in case property-related loans go bad, on top of 53.8 billion euros required under reforms enacted in February.

Bankia, with a huge exposure to the property market which crashed in 2008, would need seven billion euros to meet the requirements.

De Guindos told parliament Thursday that the new rules may mean some banks need help from the FROB but added that the "extraordinary effort on provisions will allow us to have a more efficient, clean financial sector with more solvent entities."

Further clouding the outlook, Fitch Ratings downgraded the credit rating of eight deficit-laden Spanish regions, which are pivotal to Spanish efforts to slash public deficits and rein in mushrooming debt.

Downgraded regions were Madrid, Catalonia, Andalusia, Asturias, the Basque Country, Canary Islands, Cantabria and Murcia.

"Regions still face significant financing pressure in 2012 as a large proportion of debt falls due in the second half of the year," Fitch warned in its report.