MADRID (AP) -- Spain's government says it will take control of the country's fourth largest bank and effectively nationalize it to shore up the nation's hurting banking sector.
The Economy Ministry says in a statement that €4.5 billion ($5.9 billion) in funding that Bankia SA received from Spain in 2010 and 2011 will be converted into shares of the institution's parent company.
Bankia faces the heaviest exposure among Spain's banks to bad property loans caused by a construction boom that went bust.
The decision announced Wednesday night came after investors sent Spanish government bond yields soaring and stocks plunging. They are concerned Spain may be forced to ask for a bailout like those taken by Greece, Ireland and Portugal.
THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.
MADRID (AP) -- Spain's financial markets were shaken on Wednesday as investors worried about the fallout from Greece's political crisis and awaited details of the Spanish government's latest plan to shore up its banking sector.
Prime Minister Mariano Rajoy dodged a question on whether the government planned to nationalize troubled lender Bankia, Spain's fourth-largest bank and the most exposed to bad loans on real estate.
Rajoy sought to reassure depositors who have money in Bankia S.A. and said financial reforms the government is expected to announce by Friday will "will help solve a lot of Spain's economic problems."
He said the main objected is to get Spanish banks, which are largely frozen out of international capital markets, to provide credit again to businesses and consumers. That is crucial to help the Spanish economy out of its second recession in three years. The jobless rate is 24.4 percent and GDP is forecast to shrink 1.7 percent this year.
"We know the situation is difficult, we know what we have to do and we will do it," Rajoy said at summit with his Portuguese counterpart in Oporto, Portugal.
The yield on the benchmark Spanish 10-year bonds rose to 6.06 percent, a jump of 0.28 percentage points on the day and uncomfortably high. Bond yields indicate the rate the government borrows at when it taps financial markets. Rates of above 7 percent are seen as unsustainable, and forced Greece, Ireland and Portugal to ask for bailouts.
Beyond Spain's banking problems, the market jitters were also due to a political crisis in Greece, where elections on Sunday had proved inconclusive. Political parties in Athens have so far been unable to form a governing coalition, meaning the country may have to hold new elections.
Investors worry that so much uncertainty could jeopardize the country's international bailout program, leaving Greece insolvent and even — in the worst-case scenario — abanding the euro currency bloc.
Such fears have caused turmoil in the financial markets of the weakest economies in Europe. Italy's stocks were down heavily, while the 10-year bond yield was up 0.21 percentage points at 5.57 percent.
In Spain, attention the rest of the week will remain on the banks and the government's new measures.
Bankia is key to the government's hopes of helping the sector because it is one of the most exposed to the imploded property market, with €32 billion in toxic real estate assets. Its shares fell 5.8 percent on Wednesday, its third straight day of heavy losses, while the broader market in Madrid closed down 2.8 percent.
Bankia is the result of a merger of seven cajas, or regional savings banks. The largest was called Caja Madrid.
Spanish newspapers said late Wednesday that the government, which lent €4.5 billion last year to facilitate the merger and creation of a parent company calle BFA, will exercise an option to turn that debt into shares in BFA and Bankia.
BFA is in effect a "bad bank" that holds the cajas' nonperforming real estate loans and assets.
