Spain’s banking crisis worsened Friday as the board of Bankia, the country’s biggest mortgage lender, warned that it would need an additional 19 billion euros ($23.88 billion), far beyond what the government estimated when it seized the bank and its portfolio of delinquent real estate loans.
The government is trying to head off a collapse of the bank, which could threaten the Spanish banking industry and reverberate through the financial centers of Europe and beyond. The fear is that it will not have the money to save its banks, and their 1 trillion euros, or $1.25 trillion, in deposits, and will need a rescue by the rest of Europe — even as Brussels and Frankfurt are struggling to resolve Greece’s debt debacle.
Bankia’s announcement came as Standard & Poor’s, the credit ratings agency, downgraded Bankia and two other banks, Banco Popular and Bankinter, to “junk” status and lowered the ratings of two other Spanish banks also staggered by mounting bad loans. A junk rating could make it even harder for Bankia to borrow its way out of trouble.
The rising fear now is that the recent steady trickle of deposits from Spain’s banks, which are suffering from the bursting of Spain’s real estate bubble, to institutions outside the country could eventually turn into the sort of bank run that almost brought the financial world to its knees after the collapse of Lehman Brothers in 2008.
Spain’s debt crisis is also playing out on another front. As its banks shudder, heavily indebted regional governments are also running out of money. On Friday, the government of the Catalonia region warned that it might no longer be able to finance its debts and called on the central government for help. While other regions have also sounded budget alarms, Catalonia is the biggest so far; it represents nearly one-fifth of Spain’s economy.
The central government, facing its own mounting debt, may soon be in no position to provide help to either the banks or the regions. And with an economy in recession and unemployment at the highest level in the euro zone, Madrid is falling further behind in meeting the deficit-reduction targets it has agreed to with the European Union.
Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London consulting firm that assesses sovereign debt risk, said the regional governments had become the “Achilles’ heel of Spanish fiscal policy.”
He added: “Catalonia’s request for financial support from Madrid underscores the idiosyncratic risks in Spain which make it much more difficult for the central government to enforce fiscal discipline and implement economic reforms.”
The government has also come under criticism for its failure to confine the banking problems earlier.
In February, Luís de Guindos, the Spanish economy minister, ordered banks to set aside 50 billion euros in additional provisions to cover fully their exposure to doubtful loans. This month he told them to add another 30 billion euros.
Shortly after Spain seized control of Bankia on May 9, as a first step toward recapitalizing the company, Mr. Guindos told lawmakers that the total cost of cleaning up the bank would be at least 9 billion euros. Instead, after reviewing its most recent losses, Bankia’s board estimated Friday that the total would be 23.5 billion euros — the 4.5 billion euro emergency loan previously granted to the bank and an additional 19 billion sought Friday.
Besides now being responsible for Bankia, the government could also find itself saddled with three other troubled savings banks — CatalunyaCaixa, Novacaixagalicia and Banco de Valencia — that were put up for sale, so far unsuccessfully.
“If nobody shows up for these auctions, the government could very well follow the same path as with Bankia,” said Juan José Toribio, professor at the IESE Business School. Mr. Toribio said it was unclear how the government could now finance Bankia’s rescue, adding that asking for European money was a possibility.
“Spanish bank restructuring is a moving target — the deeper the downturn, the greater the scope for a further deterioration in banks’ asset quality,” Mr. Spiro said. “This is easier said than done.”
Regional governments are responsible for half of public spending in Spain — including health care and education — and many have fallen far behind in payments to their suppliers. The regions are struggling under the budgetary constraints set by Madrid but also facing debt maturities that will total nearly 36 billion euros this year. To stay afloat, Valencia, home to Spain’s third-largest city, was forced this month to issue six-month debt at the punitively high interest rate of 7 percent.
Artur Mas, president of the Catalonian regional government, suggested Friday that regions should be allowed to issue bonds jointly to help reduce their financing cost. “We do not care which mechanism is used, as long as it yields enough funds to meet our obligations, and meet them on time, because we have bills to pay at the end of the month,” he told reporters.
Tomás Navarro, finance director of Diagnostica Longwood, a Spanish distributor of diagnostics products to state hospitals, said his company, which has annual revenue of 4 million euros, was awaiting 2 million euros in late payments, as well as sitting on 750,000 euros of bank debt. “Every company has become very worried about what will happen with our banks and the euro,” he said. “But the most pressing concern for us and so many others in Spain is not exchange rate risk but the massive shortage of liquidity.”
Bankia, whose formation was the result of a seven-way merger in 2010, was meant to be a model for the government’s effort to strengthen Spain’s savings banks, or cajas, through consolidation. But now, the increasingly costly nationalization of Bankia has prompted broader concerns among investors about how to finance the rescue of other Spanish banks. Otherwise, depositors might start pulling their money of the country’s banks en masse, threatening a collapse of Spain’s entire banking system.
As for Spanish individual investors, “their stress level has just soared in the last 15 days,” said Iñigo Susaeta, a managing partner of the wealth advisory firm Arcano.
While the richest Spaniards probably started diversifying their assets and currency mix two years ago, when Greece first asked for a bailout, Mr. Susaeta said second-tier wealthy individuals had much more recently started to look at every possible alternative. In many cases, he said, they are “simply opening whatever new accounts overseas and in other currencies that are easiest to have,” whether in Luxembourg, Canada or Norway.