Fears of a Spanish bail-out escalated after its wealthiest region asked the central government to help pay its bills and the country’s fourth largest bank asked for a €19bn (£15bn) taxpayer rescue.
Government borrowing costs soared after the Catalan President Artur Mas told reporters: “We don’t care how they do it, but we need to make payments at the end of the month. Your economy can’t recover if you can’t pay your bills.”
On Friday night the bank said it had asked the state for €19bn, of which €12bn would come via a rights issue. Luis de Guindos, Spain’s finance minister, has said the government would provide all funds needed to stabilise Bankia, which has already received €4.5bn in rescue funds.
The bank also revealed a €2.979bn loss for 2011 after restating its accounts. The bank had previously reported a group profit of €309m.
In a further blow, Standard & Poor’s slashed Bankia’s credit rating to junk, alongside two other Spanish lenders, as part of a re-rating of the sector. It followed a similar move last week by Moody’s.
Yields on 10-year Spanish government debt jumped 15 basis points to 6.26pc and Madrid’s Ibex stock index fell 0.6pc while most global stock markets trod water.
As investors once again sought safety, yields on 10-year UK gilts hit a new record low of 1.75pc. France also saw the cost of 10-year debt fall to a historic low, of 2.5pc.
A spokesman for Mr Mas later stressed that Catalonia was not running out of money but that he wanted Spain’s 17 regions to issue joint bonds, so-called “hispanobonos”, to lower their borrowing costs. “It should be done against homogeneous costs: if not the European average, then at least the Spanish average,” Mr Mas said.
His comments came just days after it emerged that the regions have €36bn to refinance this year, far more than the €8bn scheduled. Catalonia, which represents one-fifth of the Spanish economy, is the most indebted of them all, with €13.5bn due in 2012.
Nicholas Spiro, head of Spiro Sovereign Strategy, said: “Catalonia is the biggest and most indebted regional economy in Spain, and the one that will ultimately determine the success or failure of the Rajoy government’s efforts to shore up Spain’s public finances.
“Mr Mas’s plea for financial support shows how dire Spain’s regional financial woes have become and the extent to which devolution has become a fiscal liability.”
Catalonia’s deficit was supposed to be cut last year to 1.3pc of GDP, but the region overshot that mark by close to three times. It has slashed public sector wages and introduced new taxes but is still struggling to reach a deficit target of 1.5pc – a goal made more difficult by the country’s slide back into recession.
The failure of the regional governments to put their books in order is one of Spain’s “two main problems from a public finances perspective”, Fabios Fois, European economist at Barclays Capital, said. The other is “the cost to recapitalise its banks”.
The country has appointed independent valuers to establish the scale of bad debts on the banks’ balance sheets, and how much equity they need.