Spain to brave markets on regions, banks funding

Tue May 29, 2012 3:31pm EDT
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By Julien Toyer and Tomás Cobos

MADRID (Reuters) - Spain, battling a debt crisis that is shaking its government, banks and companies, will soon issue new bonds to fund ailing lenders and indebted regions despite borrowing costs nearing the 7 percent level that drove other states to seek a bailout.

The move will dent the country's strong liquidity position and further worsen public finances under scrutiny from investors and European officials who fear the euro zone's fourth economy may go the same way as Greece, Portugal and Ireland.

In the latest sign of tensions within Spain over the state of the economy and the banks, Bank of Spain governor Miguel Angel Fernandez Ordonez announced on Tuesday he would step down on June 10, one month earlier than the end of his mandate.

The country's banks and regions, reeling from a burst property bubble, are at the heart of its economic problems and economists say there is little hope of emerging from recession until they have been reinforced.

A government source told Reuters on Tuesday that Spain would likely recapitalize Bankia, which asked for 19 billion euros on Friday, by issuing new debt and possibly drawing cash from the bank restructuring fund and Treasury reserves.

"There is a clear preference to tap the market. The other option (injecting state bonds directly into Bankia) is marginal," the government source said.

"The (bank restructuring fund) FROB has liquidity and can tap the market. The Treasury also has a strong liquidity position. We'll choose one or the other mechanism."

Spain's woes, combined with growing uncertainty about whether Greece will remain in the euro zone, has reignited the 17-nation currency bloc's debt crisis on nervous financial markets, prompting calls for more radical EU action.   Continued...

A man reacts while looking at information screens at the Madrid stock exchange May 29, 2012. REUTERS/Andrea Comas