EU bank crises worsens as Bankia suspends stock

The Bankia bank headquarters is seen in Madrid, Monday May 7, 2012. Spain's prime minister said Monday the government will likely present important bank clean-up measures this week to clear up doubts about the solvency of the sector, a key source of worry over whether Spain might need a bailout. Rajoy's comments came after El Pais newspaper said the government was preparing to help out troubled lender Bankia SA. Spain's real estate bubble burst in 2008, saddling banks with enormous amounts of bad loans as unemployment rose and people could not pay their mortgages. The Bank of Spain says the sector has about 175 billion euros ($230 billion) in "problematic" holdings. Bankia is known to be among the worst hit. (AP Photo/Paul White)
Paul White

(MoneyWatch) Bankia, Spain's 4th largest bank, suspended trading in its stock today as it waits to see if Madrid will be able to come up with more than $23 billion in bailout funds.

This action, along with downgrades to some of the EU's largest and best capitalized banks, puts more pressure on the European Central Bank - already trying to cope with a sharp increase in withdrawals from banks in Greece, Spain, Italy, Portugal and Ireland this week.

Bankia, whose stock has dropped by 50 percent since January, suspended trading in its shares pending a board meeting Friday afternoon formally requested the $23.8 billion bailout from the Spanish government. Two weeks ago Bankia was partially nationalized because of problems with bad property debt. 

The government of Prime Minister Mario Rajoy has gone to extraordinary lengths to say that Bankia's status is not representative of all the nation's banks. Last week, following the withdrawal of $1.25 billion in under a week, it denied reports of a run on Bankia deposits. Bankia officials have not as yet put out a denial of their own. On Wednesday the nation's finance minister called Bankia a "unique case" and that the nation's bank rescue agency would be able to handle it.

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It is difficult to see how Spain, with a 23 percent unemployment rate and already grappling with $36 billion in public debt from its regional governments, will be able to bailout Bankia and the nation's many other troubled banks without international help.

Perhaps even more unsettling for investors is today's announcement of Moody's downgrade to the credit rating of some of the largest, best-capitalized banks in the EU's Nordic countries. The agency downgraded Sweden's Nordea, Handelsbanken and agricultural lender Landshypotek as well as Norway's DNB Bank. The rating cuts were based on Moody's conclusion the banks would have trouble raising capital in the event of a crisis, not because of any weakness in the bank's holdings. This underscores the possibility of that the banking crisis cannot be limited to Greece, Spain, Italy, Portugal and Ireland - the EU's most troubled economies.

The ECB has had to increase alternate types of funding for banks which aren't in good enough condition to qualify for mainstream ECB loans. There has been a marked increase in use of the Emergency Liquidity Assistance (ELA) program, which allows nation's central banks to borrow money on behalf of troubled banks. Also, on Thursday banks took almost $5 billion overnight ECB loans. This is the most a jump in mid-March following the Greek debt restructuring-fuelled and comes immediately after some Greek banks were cut off from mainstream ECB funding. The ECB has provided very limited information about which nations and banks are using these programs.

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