Rajoy Backtracks on Bankia Bailout Plan

Spain backtracked on a plan to use government debt instead of cash to bail out Bankia, as Prime Minister Mariano Rajoy struggles to shore up the nation's lenders without overburdening public finances.

An Economy Ministry spokesman said yesterday that the government was considering using an injection of treasury debt instead of cash to recapitalize BFA-Bankia, as laid out in legislation approved in February. Spanish bond yields rose and investors criticized the idea, which the spokesman said today had become a “marginal” option for the 19 billion-euro ($24 billion) rescue.

Spain is trying to shore up its banks and help cash- strapped regions at a time of surging borrowing costs. The yield difference between Spanish and German 10-year bonds rose to the highest since the creation of the euro this week. As Spain's market access narrows, it depends increasingly on domestic lenders, which in turn are getting cash from the European Central Bank.

The government has said it is designing a mechanism to help regions regain access to capital markets. To avoid adding to the burden on the sovereign, the government is considering guaranteeing joint regional bond issues with their tax revenue, three people familiar with the plans said.

Bloomberg