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P.M. Rajoy Says Spain Faces Tough Year Ahead

Bankia was formed in 2010 in a merger of seven troubled and unlisted Spanish savings banks, and was floated on the Spanish stock exchange last year. Its shares, a large number of which were sold to individual savers and pensioners, have fallen nearly 80 percent in value since the floatation.

Officials with the country's bank bailout fund ⿿ the Fund for Orderly Bank Restructuring ⿿ revealed late Wednesday that Bankia was worth minus ⿬4.2 billion. The bank's negative value ⿿ a result of combining the bank's current balance sheet with the level of business it is expected to generate in the future ⿿ was due to worse-than-expected losses of ⿬3.2 billion on toxic property investments.

FROB has used the negative value to determine the size of Bankia's capital injection. The bank, and parent company Banco Financiero y de Ahorros, have received a ⿬18 billion bailout to strengthen their balance sheets ⿿ ⿬4.5 billion of which was paid in September.

In a statement released Thursday, BFA said it had received a capital increase of ⿬13.5 billion. Bankia itself will receive ⿬10.7 billion of this in the form of bonds.

With both of these operations completed, the BFA-Bankia group said its capital ratios would be "above legal requirements" and would increase its capital levels over the next three years to ⿬5.4 billion.

However, investors have been offloading their shares in Bankia over the past few days because the ⿬10.7 billion in bonds will convert into shares next year, thereby significantly diluting the value of existing stock.

As a result of the capital increase, Bankia will be suspended from the IBEX-35 index of leading Spanish shares in January.

Bankia's falling share price Friday also hit Banco de Valencia, another nationalized lender, whose stock fell 20 percent, having closed 21 percent down the previous day.

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