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Bankia Debtholders Face Bailout Losses

James Fontanella-Khan in Brussels and Daniel Schäfer in London
Wednesday, 28 Nov 2012 | 11:25 PM ET

Bankia's subordinated debt and hybrid securities holders will face large losses on their investments as part of a restructuring demanded by Brussels in return for eurozone aid.

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The investors — including tens of thousands of retail clients — will have to absorb losses of between 46 and 14 percent as part of the group's capital raising exercise, the nationalized Spanish bank said on Tuesday.

The European Commission has urged such a burden-sharing by bondholders as part of a €100 billion rescue package for the Spanish banking sector agreed with Madrid this summer.

However, this proved highly controversial in Spain where the government feared the political backlash from inflicting losses on tens of thousands of small savers.

Bankia said holders of preferred shares would face a writedown of 39 percent, those that own perpetual subordinated debt 46 percent and investors in subordinated debt with a maturity date would have to swallow a loss of 14 percent.

About €30 billion of such products were sold to individual savers before the crisis by small Spanish banks including Bankia, according to estimates by Barclays.

The writedowns at Bankia are part of a restructuring plan announced on Wednesday that includes 6,000 job cuts and the sale of €50 billion of assets.

The restructuring and burden sharing were demanded by Brussels in return for a capital injection that Spain's fourth-largest lender is set to receive from the EU's permanent rescue fund.

The nationalized bank, which has come to symbolize the country's broader economic woes, forecast a €19 billion loss this year but hopes to return to profitability next year.

It also said it would cut 39 percent of its branches. "It's a demanding but realistic plan," said José Ignacio Goirigolzarri, Bankia's chairman. "Bankia is a company that with this aid is capable of recovering and we are going to fight so that it does."

"The approval of the restructuring plans ... is a milestone in implementing the memorandum of understanding between euro area countries and Spain," said Joaquín Almunia, the EU's competition commissioner.

Spain's banking sector faced its worst crisis since the second world war following the bursting of the country's property bubble, forcing its government to request a bailout for its banks in June.

Bankia will end up with €36 billion in state and eurozone aid once the latest capital injection is made, according to the commission.

Catalunya Banc, NCG Banco and Banco de Valencia — the other banks being recapitalised — will receive €9.1 billion, €5.4 billion and €4.5 billion, respectively, from the European Stability Mechanism.

Banco de Valencia will be acquired by Caixabank and will cease to exist as an independent bank, as it could not be restored on a standalone basis, said Mr Almunia.