Spanish Government takes control of the country’s fourth biggest bank

The state will take control of Spain’s fourth-biggest bank, Bankia, as it tries to shore up an overvalued property loan-ridden balance sheet.

The economy ministry said in a statement overnight it will take ownership of 45% of the bank by converting a state-backed loan of 4.47 billion euros ($AUS5.77 billion) into shares, “meaning it will take control”.

Former Bankia executive chairman, Rodrigo Rato, who was previously a Spanish economy minister and who once led the IMF, announced his resignation on Monday as the news broke of the rescue.

The dramatic decision comes after the conservative Prime Minister has said his government will not nationalise private companies and two days before his government announces banking reforms to ease the crushing burden of overvalued loans doled out during a property bubble that burst in 2008.

Analysts fear the rot goes much deeper.

One of the biggest worries for investors is that they do not know the real value of the banks’ exposure to the housing sector.

The banking sector problems sent the borrowing rate on Spanish government bonds above the dangerous 6% level.

Madrid IBEX-35 share market index fell 2.77% to 6,812.7 points– the lowest finish since July 2003.

Spanish bank Santander’s shares declined 4.52% on the news. It is Europe’s biggest bank.