The Spanish government's decision on May 9th to nationalize Bankia, the country's fourth-largest bank, by taking control of 45% of the voting shares, was triggered, according to Ambrose Evans-Pritchard's column in the Daily Telegraph, "after auditors Deloitte refused to sign off the bank's books, amid allegations of 3.5 billion euros of inflated assets." But this is of course the case for the entire Spanish banking sector, as everybody knows. Fitch rating agency has warned that the fact that the Spanish banks have borrowed from the ECB by putting up their best collateral, means that they have de facto subordinated other debt, which could be a real problem if other banks go bust like Bankia.
Today's Financial Times has an editorial warning that the mere bailout of Bankia is not enough, but it's hard to imagine that Prime Minister Rajoy could do more, given that he is "struggling to contain a backlash to austerity." The FT's Lex column is more specific: "If the government wants to restore trust in the banks and sovereign debt, the solution has to be both industrial in scale, and unimaginably bigger than the market expects—as TARP was in the U.S."
In other words, bring on the Big Bazooka. These guys have a one-track mind.d.