MADRID (AP) — Spanish stocks rebounded Thursday while the pressure on the country's government bonds eased, as investors reacted positively to the government's confirmation that it will nationalize the country's fourth largest bank.
The benchmark Ibex index was up 1.7 percent in morning trading, outperforming all other indexes in Europe. And the yield on the country's ten-year bond dropped 0.08 percentage point. Despite the decline, the country's borrowing rate in the markets for its benchmark bond remains at the perilously high level of 5.8 percent. Bond yields indicate the rate the government borrows at when it taps financial markets. Rates of above 7 percent are seen as unsustainable in the long-run.
The more benign market backdrop came a day after the Economy Ministry said it will take over Bankia SA, which has high exposure to bad property loans following a crash in the construction sector. The government is hoping that its plan for the bank, which will be fleshed out further Friday alongside other measures, will form part of a strategy to convince investors the country won't need a bailout like those taken by Greece, Ireland and Portugal.
Most bank stocks rose, but Bankia shares fell 2.2 percent, adding to steep losses earlier in the week.
Under the nationalization deal, €4.5 billion ($5.9 billion) in funding that Bankia 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 a 24.4 percent unemployment rate — the highest of the 17 countries that use the euro.
Bankia, which is the result of a merger of seven troubled cajas, or regional savings banks, faces the heaviest exposure among Spain's banks to bad property loans caused by a construction boom that went bust, and holds €32 billion ($41.4 billion) in problematic assets related to the property debacle.
The government decision to assume control of the bank came after Bankia directors approved the plan late Thursday on a day that nervous investors sent Spanish government bond yields soaring and stocks plunging.
The markets have grown increasingly concerned over recent weeks that Spain may end up having to be bailed out amid doubts that the government will be able to push through its debt-reduction plan at a time of recession and sky-high unemployment. However, Europe would find it difficult to do that as the Spanish economy is double the size of Greece, Ireland and Portugal combined.
The Economy Ministry called the Bankia nationalization "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."
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, which is expected to contract 1.7 percent this year, Prime Minister Mariano Rajoy said before the nationalization announcement.
Associated Press writer Daniel Woolls contributed from Madrid.