Spanish bank hit by report of withdrawals

MADRID (AP) -- A recently nationalized Spanish bank's shares plummeted Thursday after a newspaper said depositors were rushing to withdraw money, while the country paid sharply higher interest rates in a debt auction, reflecting concerns the country will be caught up in the fallout of the Greek crisis.

Shares in Bankia SA, a lender nationalized last week, plunged as much as 27 percent on a report in the newspaper El Mundo that customers have withdrawn more than (euro) 1 billion ($1.27 billion) since the state took it over a week ago. By midafternoon in Madrid, the shares had recovered somewhat to trade 11 percent lower at (euro) 1.47.

Spain's fourth-largest lender, Bankia insisted its depositors' money was safe, while the government denied there was a run on the bank.

In a statement, the company said deposit flows in and out of the bank in the first half of May were "essentially of a seasonal nature." It did not address the number given by El Mundo, nor would a bank official reached by phone.

The statement also noted that when the government nationalized Bankia on May 9, it established that the bank was solvent and said its depositors had nothing to worry about.

"It is not true that at this time a flight of deposits from Bankia is taking place," said Fernando Jimenez Latorre, the deputy economy minister, adding that the bank was big and "has enormous strength."

Since Bankia was created last July as the listed result of a merger of seven regional savings banks its share price has dropped nearly 70 percent. Its market capitalization is now lower than that of smaller Spanish banks.

The drop in Bankia's shares helped push the broader Ibex 35 stock index down about 1 percent on Thursday. Other banks also saw their share price fall with Banco Santander SA down 3 percent at one point, although it later recovered to 1.8.

The concerns about the financial sector augmented jitters about the broader country's financial future at a time when Greece's political chaos threatens to destabilize the entire European market.

Investors worry that a messy Greek exit from the currency bloc could destabilize Spain's financial sector. The concern is that the banking sector might not be able to meet tough new provisioning requirements and require bailouts if concerns about their stability worsen.

The government, meanwhile, risks requiring a bailout itself if it needs to rescue the banks. It is already struggling to meet deficit-reduction targets during a painful recession, with austerity measures draining money from the economy.

The Treasury on Thursday sold three kinds of bonds, two maturing in 2015 and one in 2016, for a total of (euro) 2.5 billion ($3.18 billion). For the three-year note, the only one which was comparable to previous sales, Spain's borrowing rate -- or yield -- rose to 4.87 percent, from 4.04 percent in a similar auction on May 3.

On the secondary market, where issued bonds are traded freely, the interest rate on Spanish 10-year bonds stood at a worryingly high 6.32 percent. It has risen sharply from below 5 percent in March and is edging toward the 7 percent mark that is considered unsustainable in the longer term. Greece, Ireland and Portugal sought bailouts when their 10-year bond yields remained stuck above that level.

The spread, or difference, between Spain's 10-year debt yield and that of the safe-haven German bunds was 4.86 percentage points in afternoon trading. Investor appetite in the auction was nevertheless strong, with demand covering the amount on offer between 2 and 4.5 times.

Prime Minister Mariano Rajoy warned this week that the country risked being frozen out of capital markets because of the sky-high interest rates, or yields, it would have to pay to maintain its debt.

El Mundo had reported it had obtained access to data presented at a Bankia board meeting Wednesday which said depositors had withdrawn (euro) 1 billion since last Wednesday, the day the nationalization was announced. The bank is heavily exposed to the country's collapsed property market, with (euro) 32 billion in assets deemed problematic.