HispanicBusiness

The chairman of Spanish banking group Bankia resigned unexpectedly Monday, the same day that Prime Minister Mariano Rajoy said his government may use public money to rescue the country's ailing banks.

Rodrigo Rato, a former managing director of the International Monetary Fund (IMF), had hitherto defended the solvency of Bankia, which groups the Madrid savings bank Caja Madrid and six smaller regional savings banks.

Bankia is considered the bank most exposed to the meltdown of Spain's decade-long property boom, which left the country's lenders with toxic real estate assets worth about $230 billion.

The government is due Friday to approve a decree guaranteeing that banks are "perfectly capitalized" within a short time, Rajoy told the radio station Onda Cero.

He said the government may use public money to rescue banks, but only in an "extreme" situation. The government had earlier maintained that it would not inject more money into banks, which have already received more than 14 billion euros from the bank restructuring fund FROB.

The reform was expected to include the creation of a liquidation company or companies to rid banks of bad real estate assets, which would be evaluated and sold off.

The assets would be sold at "real" market prices, even if it was at a loss, Rajoy said. The reform would not influence Spain's plans to cut the budget deficit from 8.5 per cent of GDP in 2011 to 5.3 percent this year, he added.

Bankia's mother company Banco Financiero y de Ahorros (BFA) holds nearly 32 billion euros in sour assets by its own account, most of which come from the property sector.

The government was preparing a rescue plan including loans worth up to 10 billion euros as well as more changes in top-level management, several media reported.

Bankia has already received billions of euros in state loans.

Rato said in a communique that his resignation was in the best interests of Bankia, where he will be succeeded by former BBVA bank chief executive Jose Ignacio Goirigolzarri.

The IMF recently urged Bankia to strengthen its balance sheet and improve management practices.

Bankia shares fell 3.9 per cent at the Madrid stock exchange following the resignation of Rato, 63, who was Spanish economy minister from 1996 to 2004. He then headed the IMF from 2004 to 2007.

Concern about Spanish banks has become one of the main factors fanning fears that the country may need to be bailed out by the European Union and the IMF.