THE COST OF BORROWING for the Spanish government has reached its highest in six months this morning, as investors dumped shares in one of the country’s major banks which has sought a €19 billion bailout.

Shares in Bankia, the country’s fourth-largest lender, opened with a 24 per cent loss in Madrid this morning before paring back some of the earlier losses to lose about 15 per cent of its value.

The large-scale sale of Bankia shares came after the bank – formed in 2010 through the merger of seven smaller, troubled lenders – said it would be seeking €19 billion in funding from a special State fund established specifically to recapitalise the financial sector.

The cost of a 10-year loan for Spain rose to 6.45 per cent on the back of the news, the highest it had been since late November before the ECB’s aggressive bond-buying programme managed to ease the oversupply of secondhand debt.

Borrowing costs were lower than 6 per cent as recently as May 10 – with the spike indicating that many investors feel the cost of recapitalising the banking sector could, as it did with Ireland, end up seeing the Spanish government priced out of the market itself.

Novel solution

It has been suggested that Spain hopes to fund Bankia in a system similar to that used by Ireland in making the last repayment on its promissory notes: by issuing a government bond directly to Bankia, which can then be presented to the ECB as collateral.

This would avoid the need for Spain to have to sell a bond on the open markets – potentially at penal interest rates – simply to fund a private institution.

This lunchtime Rajoy said the rescue of Bankia would not affect the Spanish government deficit, and called for the new European Stability Mechanism to lend directly to banks – echoing a similar call previously made by Enda Kenny.

The request for a bailout caps a year for Bankia since it was first listed on the Spanish stock exchange: shares in the bank were originally priced at €3.75, and enjoyed two weeks of growth before beginning a steady decline.

This lunchtime’s price of €1.31 means investors who bought at the IPO have lost 65 per cent of their investment, with over €2 billion of the bank’s original €3.1 billion value wiped out.

Bankia’s troubles also come after the local administration in Catalonia, the wealthiest of Spain’s autonomous governments, on Friday asked for help from the central government in meeting its obligations.

Catalonia must not only cover its deficit this year but is also due to repay €13 billion of previously outstanding bonds.