Spain's decision to nationalize the troubled bank Bankia failed to dispel investor concerns on Thursday, but in Brussels it was regarded as a step in the right direction.
Bankia shares dropped by more than 3 per cent on the Madrid stock exchange in late afternoon trading. Shares had already gone down by more than 13 per cent since the beginning of the week.
Several other Spanish banks, made a stronger showing. Shares in the two largest, Santander and BBVA, were up by more than 5 per cent.
The yield for Spanish 10-year-bonds dropped slightly in the morning, but remained above 6 per cent.
The ratings agency Standard & Poor's maintained a negative outlook for Bankia, Spain's fourth-largest bank, saying the government's decision to nationalize it revealed a growing uncertainty about its future.
In Brussels, a European Union official saw the nationalization as positive. "It allows for the consolidation of the bank and the banking sector," the official, who did not want to be named, said.
The European Commission is to review the plan since it involves state aid that has to be approved.
The institution was in touch with Spanish authorities "on a technical level," a spokesman for European Competition Commissioner Joaquin Almunia told reporters in Brussels.
The Spanish government announced Wednesday that it will convert into shares the 4.6 billion euros (5.9 billion dollars) it had injected into Bankia through the bank restructuring fund FROB.
In doing so, the state will become the biggest shareholder in Bankia, with a 45-per-cent ownership stake.
The government is also expected to inject up to 10 billion euros into Bankia, a group of seven savings banks.
Bankia chairman Rodrigo Rato announced his resignation on Monday and was succeeded by former BBVA chief executive Jose Ignacio Goirigolzarri.
Bankia was the local bank most exposed to the meltdown of Spain's property bubble four years ago. It holds nearly 32 billion euros in toxic real estate assets.
The nationalization was seen as an attempt to prevent a further deterioration of its finances and to calm financial markets.
Spain has already rescued seven smaller savings banks, but the Bankia rescue is much bigger and therefore likelier to fuel concern about Spain's financial solidity.
The Bankia rescue was to be accompanied by a more general financial reform due to be announced on Friday and expected to include a liquidation entity to rid banks of souring real estate assets by evaluating and selling them off.
Spanish banks hold a total of more than 180 billion euros in troubled real estate assets in the form of land, housing and bad loans.
The government earlier ordered banks to set aside 54 billion euros in provisions against toxic real estate assets.
Banks will now be told to raise between 32 and 42 billion euros more in provisions to cover bad, as well as sound, loans in their property portfolios, media reported.
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