Central Banks

Tuesday, May 29, 2012 - 18:05

ECB Rejects Spain Plan To Tap Central Bank Cash For Bankia:FT

PARIS (MNI) - The European Central Bank has rejected a plan by Spain to recapitalize its troubled lender Bankia by tapping ECB cash using government bonds as collateral, the Financial Times reported on its website Tuesday night.

The business daily cited anonymous European officials, who reportedly said the ECB had told the government of Spanish Prime Minister Mariano Rajoy that Bankia needed a "proper capital injection" and that its plan to do so via ECB refinancing operations would risk violating an EU prohibition on monetary financing.

Spain over the weekend floated the idea of recapitalizing Bankia by giving E19 billion worth of Spanish sovereign bonds to its parent company, BFA, which would then be used as security against three-month money at the ECB's refinancing window.

The mere mention of the idea by Spain hit a raw nerve in financial markets, which interpreted it as a tacit admission that Madrid feared it would be unable to raise the requisite sum at affordable rates in capital markets. Yields on Spain's 10-year bonds spiked above 6.5% on Tuesday though they later eased back below that level.

The news of the ECB's rebuff to Madrid came only hours after the Bank of Spain announced that its governor, Miguel Angel Fernandez Ordonez, would relinquish his post on June 10, a month before the official end of his 6-year term. The central bank said Ordonez chose the date because it coincided with a "new phase" in Spanish financial decision-making and he wanted to ensure that the new governor would be involved in it from the very beginning.

It is well known that Ordonez has been increasingly criticized in Spain for failing to prevent the banking crisis that is now threatening to engulf the country and the whole Eurozone.

According to the Financial Times, the ECB's disapproval of Madrid's plan for financing Bankia has hardened the insistence of Rajoy's government that the ECB must be a lender of last resort and restart its SMP bond buying program.

Many analysts and some Eurozone officials increasingly doubt Spain's ability to recapitalize its banks without some form of aid from its European partners. But Rajoy has thus far steadfastly ruled out any kind of bailout package.

According to the FT, government officials in Madrid argued that bailouts for Greece, Portugal and Ireland have been catastrophic. They say that Madrid has implemented reforms requested by the European Commission and now needs to be given relief in the form of ECB bond purchases to keep the government's borrowing costs under control.

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