AP

MADRID CONSERVATIVE Spanish Prime Minister Mariano Rajoy insisted on Monday that Spain’s banking sector would not need an international rescue as concern over the bailout of nationalised lender Bankia sent its stock price plummeting while Spain’s borrowing costs soared.

“There will be no rescue of the Spanish banking sector,” Rajoy told a press conference.

However, he added that the government had no choice but to bail out Bankia which has been crippled by Spain’s real estate collapse.

“We took the bull by the horns because the alternative was collapse,” said Rajoy, stressing that Bankia clients’ savings were now safer than ever.

Bankia, Spain’s fourthlargest bank, is estimated to have €32 billion in toxic assets and was effectively nationalised earlier this month when the government converted €4.5 billion in rescue funds it gave last June into shares.

The lender’s shares fell 28 per cent on opening in Madrid on Monday Bankia’s first day back on the stock exchange following its announcement Friday that it would need the €19 billion ($23.8 billion) in state aid to shore itself up against its bad loans, a far bigger bailout than expected. The shares, which recovered slightly by midday to trade 13 percent down at €1.36, had closed at €1.57 before trading was suspended Friday.

Bank of Spain estimates show Spain’s lenders are sitting on some €180 billion ($233 billion) in assets that could cause them losses. The government fears the cost of rescuing the country’s vulnerable banks could overwhelm its own finances, which are already strained by a double-dip recession and an unemployment rate of nearly 25 percent, and force it to seek a rescue by the rest of Europe.

Among the chief concerns surrounding Bankia’s request for state aid the largest in Spanish history is just how Spain plans to fund it. The country’s borrowing costs have risen sharply over the past few weeks.

On Monday, Spain’s interest rate, or yield, for 10-year bonds on the secondary market a key indicator of market confidence was up 13 basis points by midday to 6.42 percent.

However, Rajoy said this had more to do with Europe and worries over Greece and dismissed suggestions it had anything to do with Bankia.

A rate of 7 percent is considered unsustainable over the long term and there is concern that Spain might soon be pushed join the ranks of Greece, Ireland and Portugal and seek an international bailout.

The Prime Minister said that the government had not yet decided how it would proceed in funding the Bankia bailout.

However, the Economy Ministry said earlier Monday that it is considering injecting government debt into Bankia’s accounts. The bank could then turn to the European Central Bank and use those bonds as collateral to receive cash for the recapitalisation.

Analysts said that such a technique would only prove to investors that the country is having difficulties raising money on the international debt markets and would therefore make them even more reluctant to buy Spanish debt.

“It sends a signal of a lack of confidence,” said Mark Miller of Capital Economics in London.

Oscar Moreno of Madrid brokerage Renta4 said the government has little choice: either use this uncommon technique or simply ask the European Union for money to bail out the banking sector which Rajoy has vehemently ruled out as unnecessary.

Moreno said Bankia’s share price and the rising bond yield showed investors the Spanish banking sector’s woes are getting worse. Only last week, for instance, Economy Minister Luis de Guindos said the government would inject about €9 billion into Bankia.

“Basically, what the investor sees is that, with what has emerged with Bankia, more money is going to be needed than what was originally stated” than in two government decrees ordering banks to put aside a total of some €80 billion in provisions to cushion against losses from real estate, Moreno added.