Spain's government will effectively nationalize the nation's fourth largest bank to shore up the hurting banking sector and try to convince investors the country doesn't need a bailout like those taken by Greece, Ireland and Portugal, the Economy Ministry said Wednesday.
Under the deal, (EURO)4.5 billion ($5.9 billion) in funding that Bankia SA received from Spain in 2010 and 2011 will be converted into shares of the institution's parent company, the ministry said in a statement.
On Friday, the government is expected to announce a more wide-ranging banking system overhaul to free up frozen credit as Spain weathers a recession and 24.4 percent unemployment _ the worst jobless rate among the 17 nations that use the euro.
Bankia faces the heaviest exposure among Spain's banks to bad property loans caused by a construction boom that went bust, and holds (EURO)34 billion in problematic loans.
The government decision to assume control of the bank came after Bankia directors approved the plan and nervous investors sent Spanish government bond yields soaring and stocks plunging. They are concerned Spain may be forced to ask for a bailout.
Spain will get 45 percent of Bankia under the deal and "will acquire control," the ministry said.
The statement called the move "a necessary first step to ensure solvency, the tranquility of the depositors and to dispel the doubts of the markets on the capital needs of the entity."
Hours before the announcement, Prime Minister Mariano Rajoy dodged a question on whether Bankia would be nationalized but tried to reassure the 10 million Spaniards who have accounts with Bankia and said Friday's additional reforms "will help solve a lot of Spain's problems."
Spain's goal is to give incentives for Spanish banks largely frozen out of international capital markets to again start giving credit to hurting businesses and consumers caught up in a bleak economy expected to contract 1.7 percent this year, Rajoy said.
"We know the situation is difficult, we know what we have to do and we will do it," Rajoy said in Portugal.
The yield on the benchmark Spanish 10-year bonds rose Friday to 6.06 percent, a jump of 0.28 percentage points on the day and uncomfortably high. Bond yields indicate the rate the government borrows at when it taps financial markets. Rates of above 7 percent are seen as unsustainable, and forced Greece, Ireland and Portugal to ask for bailouts.
Beyond Spain's banking problems, the market jitters were also due to a political crisis in Greece, where elections on Sunday were inconclusive. Political parties in Athens have so far been unable to form a governing coalition, meaning the country may have to hold new elections.
Investors worry that so much uncertainty could jeopardize the country's international bailout program, leaving Greece insolvent and even _ in the worst-case scenario _ abandoning the euro currency bloc.
The fears have caused turmoil in the financial markets of the weakest economies in Europe. Italy's stocks plunged, and the country's the 10-year bond yield rose 0.21 percentage points to 5.57 percent.
In Spain, attention the rest of the week will remain on the banks and the government's new measures.
Bankia shares fell 5.8 percent on Wednesday before the announcement, the company's third straight day of heavy losses, while the broader market in Madrid closed down 2.8 percent.
Bankia is the result of a merger of seven cajas, or regional savings banks. The largest was called Caja Madrid.
Associated Press writers Daniel Woolls and Jorge Sainz contributed from Madrid.
(This version CORRECTS Corrects unemployment rate, 24.4 percent and not 22.4 percent)