Spain Seizes Major Bank, Adds Fuel to Euro Debt Wildfire

May 24, 2010 Updated: May 25, 2010

[xtypo_dropcap]T[/xtypo_dropcap]he Bank of Spain seized CajaSur, a major bank, and injected about 550 million euros ($690 million) into the ailing bank, crippled by losses related to real estate and mortgage investments.

CajaSur was taken over by the central bank after failing to consummate a merger with larger rival Unicaja, the bank said. CajaSur had been under the control of the Roman Catholic Church.

The Bank of Spain appointed a team of administrators to keep the bank in operations. The bank had employed around 3,100 employees in the country.

Belt-Tightening
The bank failure underscores investor concern over Spain’s finances; as some fear that the country may be next to suffer Greece’s fate.

Europe has engaged in a series of austerity measures to curb government debt and calm the financial markets, with Greece on the verge of financial collapse.

Countries under pressure are Portugal, Italy, Greece, and Spain, collectively known as “PIGS.” Countries have borrowed heavily by issuing debt securities to fund growth during the recent recession. Such bonds fund infrastructure expansion, social services, and help pay government workers. Traditionally, government debt was considered to be relatively safe as countries can raise taxes to increase revenues or issue new bonds to pay back old ones.

But recently, more investors are worried that countries will have a hard time paying back their debts and they may have borrowed too much over the last several years—governmental tax revenues have fallen sharply due to the fact that many individuals and corporations are paying fewer taxes.

Two weeks ago, the EU and the International Monetary Fund agreed on a 750 billion euro ($950 billion) bailout fund to purchase government debt if needed.

For Spain, its debt owed is around 54 percent of its GDP.