- The Spanish government has been battling for weeks to reassure financial markets
- €33bn has been injected into Spain's banks since the crisis began
- Pressure on Spain's banks was increased by Standard & Poor's cutting credit ratings of five lenders
- Share trading in Bankia was suspended on Friday
Spain will make an emergency €19bn investment in Bankia, the stricken savings bank, in a bold bid to restore confidence in the stability of the country's financial sector.
Madrid's biggest bank nationalisation will take the total amount of state aid pumped into Bankia to €23.5bn, and will give the government as much as 90 per cent control of Spain's second-largest bank by domestic deposits.
The Spanish government has been battling for weeks to reassure financial markets that it can contain the difficulties at its weaker banks, which lent aggressively during the property bubble and are saddled with about €180bn of bad developer loans.
Bankia, which requested the aid on Friday night, said the bulk of the injected capital will be used to boost provisions against real estate losses to a so-called coverage ratio of nearly 49 per cent. The bank's core tier one capital ratio is set to rise to 9.6 per cent, in line with better capitalised rivals.
Bankia also restated its results for 2011, reporting a €2.97bn loss, against a previously reported €309m net profit.
The €19bn being pumped into Bankia raises the total amount injected into Spain's banks since the crisis began to more than €33bn, or about 3 per cent of gross domestic product. That figure is expected to rise as the economy continues to struggle and smaller banks ask for state aid.
It will also all but wipe out thousands of small savers and clients of Bankia that bought into a Madrid stock market listing in July that was endorsed by Spain's then government and the Bank of Spain.
The pressure on Spain's banks was increased by Standard & Poor's cutting the credit ratings of five lenders on Friday evening, including downgrading Banco Popular, Bankia and Bankinter to "junk" status.
Financial markets were further rattled by comments from Artur Mas, president of Catalonia, which forms a fifth of Spain's economy and is larger than Portugal by output, that the region was running out of options to refinance its debts, and wanted backing from Madrid to borrow.
The Catalan call for financial assistance unnerved bond markets and caused Spain's 10-year borrowing costs to jump to 6.31 per cent, not far from the highest since late November. The euro fell for a fourth straight day to the lowest since July 2010.
Juan José Toribio, a professor at the IESE business school, said that Spain would likely be able to cope with the amount injected into Bankia, which was double the forecasts of some analysts, but that increased the possibility of the country asking for some form of European aid.
"This contains the possibility of having to resort to the European Financial Stability Facility," he said.
Paul Griffiths, head of fixed income at Aberdeen Asset Management, said: "The Catalan request underlines the sensitive position Spain is in, and there is a real risk that the markets get even more concerned. Europe has to come up with a European solution to calm things now."
However, Soraya Sáenz de Santamaria, Spain's deputy prime minister, repeated the government's position that it was "absolutely not" considering requesting aid from Brussels to recapitalise the country's banking sector.
José Ignacio Goirigolzarri, the new Bankia chairman installed by Madrid after the removal of Rodrigo Rato this month, moved to reassure savers after earlier concerns depositors were removing money from the bank.
"Clients can now have absolute confidence that their savings are now more safe and secure than ever before," he said.
Shares in Bankia, which was formed out of a merger of seven domestic Spanish savings banks, the largest being Caja Madrid and Bancaja of Valencia, had been suspended earlier on Friday ahead of the bank's board meeting to approve a plan to request the state aid from the government.
Spain this month announced that its lenders would be forced to set aside an extra €30bn in provisions against their property loan exposure, and had indicated that the total bill for the state to help lenders unable to raise the funds would not be greater than €15bn, a number already exceeded by the Bankia rescue.