ECB Opposes Spain Bank Idea

red bottom heels MADRID—European Central Bank officials signaled they would oppose any attempt to fund the €19 billion ($23.8 billion) recapitalization of Spain's Bankia SA BKIA.MC -16.25% via the central bank's lending facilities, according to people familiar with the situation.

Spain has pledged the rescue of Bankia, its third-largest lender by assets, at a time when its finances are stretched to their breaking point and the government is desperately trying to ward off an international bailout.

Spain's own bailout fund has only about €9 billion left and, though it can be replenished through debt issuance, recent auctions have seen soaring borrowing costs and falling demand.

As a result, government officials are exploring an unorthodox alternative to fund the Bankia rescue: issue debt securities to the bank which it would then use as collateral to raise cash from ECB lending facilities.

Spanish officials say they have not formally proposed this idea to the ECB and are only considering as a last resort if "we completely lose access to markets," a government spokeswoman said.

red sole shoes But this idea would encounter stiff resistance within the ECB's governing council. One concern, people familiar with the matter said, is that it would push the central bank closer to the realm of financing governments, something its rules forbid it to do.

Although Spanish government bonds currently meet the ECB's minimum ratings requirements, making them eligible for ECB loans, the central bank does have some leverage on the issue. ECB rules also give it full discretion to reject any collateral, even if the collateral conforms to its ratings requirements, if the central bank feels it is necessary to protect its balance sheet.

ECB officials have repeatedly said it is up to governments to fix problems in their domestic banking systems, not the ECB. Officials may also fear that such a step would set a precedent for other cash-strapped governments with banking problems.

An ECB spokeswoman declined to comment.

The Spanish government spokeswoman aimed to calm concerns over Spain's ability to raise the funds for Bankia, saying it won't need them right away, and when it does, it won't need the full €19 billion all at once.

In the meantime, the government of Prime Minister Mariano Rajoy is hoping to persuade its European Union partners to exert joint pressure on the ECB to offer increased financial support for fiscally frail countries like Spain. One option would be for the central bank to resume its past practice of buying bonds in secondary markets to bring down borrowing costs.

red bottom shoes Some analysts said Spain's unconventional approach to the Bankia rescue has undermined faith in the government's crisis-fighting capabilities. "While the details … are not yet completely clear, the shaky plan understandably doesn't boost confidence," analysts from KBC bank said.