Spain prepares to nationalise Bankia amid market turmoil

Bankia's board was meeting on Wednesday night, with reports that new chairman José Ignacio Goirigolzarri would ask the government to take control of the troubled bank

Bankia is on the verge of being nationalised. Photograph: Paul White/AP

Spain's government is poised to partly nationalise the country's fourth-largest bank, Bankia, according to reports in the Madrid press, as investors dumped Spanish bonds and stocks amid increasing worries about the country's banking sector.

Bankia's board was meeting on Wednesday night, with reports that new chairman José Ignacio Goirigolzarri would ask the government to take control of the troubled bank as it sinks under a mountain of toxic real estate assets.

It was unclear how that would happen, however, with reports that the government would convert a €4.5bn (£3.6bn) loan to the banking group's parent company, BFA, into shares. Other estimates see the bank needing €10bn.

Jitters about banks drove the Madrid stock market to an eight year low, while yields on benchmark 10-year Spanish sovereign bonds soared back over the key 6% level.

The selloff was further proof that Spain has become the main worry in the troubled eurozone as the country suffers a second recession in three years and unemployment hits 24%.

The Bankia debacle showed how Spain's banking sector has failed to digest the pile of toxic assets and debt left over by a property bubble that burst four years ago. There have been suggestions that it will need help from the eurozone's rescue fund to tackle the problem.

Prime minister Mariano Rajoy dodged questions on Bankia saying only that reforms to be announced by Friday will "will help solve a lot of Spain's economic problems".

Those reforms will include yet another round of provisioning against toxic real estate with banks ordered to set aside a further €35bn on top of the €54bn they are already provisioning, financial sources told Reuters.

Bankia was created just 17 months ago by the merger of seven regional savings banks in an attempt to shore up their combined defences against the bad real estate loans, worthless building land and unsold apartment blocks they had accumulated.

Saving banks, many controlled by local politicians, were the most reckless lenders to developers, land speculators and building companies, which have left Spanish banks burdened with €184bn of problem loans and assets.

Alberto Garzón, a deputy for the communist-led United Left party, warned Rajoy against using public money to nationalise only the Bankia group's separate "bad bank" — where many of its toxic assets are parked – while leaving the healthier part of the bank in private hands.