Senate leaders work to avoid New Year's "fiscal cliff"

1 of 12. Senate Majority Leader Harry Reid (D-NV) (2nd L) walks with unidentified aides and security to his office at the U.S. Capitol after returning from a meeting with President Barack Obama at the White House in Washington December 28, 2012.

Credit: Reuters/Mary Calvert

By Richard Cowan and Rachelle Younglai

WASHINGTON | Sat Dec 29, 2012 7:22pm EST

WASHINGTON (Reuters) - Congressional negotiators burrowed into their offices on Saturday to see if they could stop the U.S. economy from falling off of a "fiscal cliff" in just three days when the biggest tax increases ever to hit Americans in one shot are scheduled to begin.

Aides to Senate Majority Leader Harry Reid, a Democrat, and Senate Republican leader Mitch McConnell worked through the day on a possible compromise that would set aside $600 billion in tax increases and across-the-board government spending cuts that are set to kick in next week.

A variety of lower taxes are scheduled to expire at the end of Monday, the last day of the year. If allowed to rise, the approximately $500 billion value of the revenue increases would represent a historic hike when taken together.

The combined punch of the tax increases and spending cuts could push the U.S. economy back into recession.

"We're now at the point where, in just a couple days, the law says that every American's tax rates are going up. Every American's paycheck will get a lot smaller. And that would be the wrong thing to do for our economy," President Barack Obama said in his weekly radio and Internet address, which was broadcast on Saturday.

McConnell left the U.S. Capitol after spending seven hours in his office. "We've been trading paper all day and talks continue into the evening," he told reporters on his way out.

A source with knowledge of the talks, speaking on condition of anonymity, said: "We are still very far apart with almost no time left on the clock."

TEMPORARY PATCHES

One congressional aide close to the talks said that most of what was being discussed late on Saturday would provide temporary patches to the "fiscal cliff" dilemma. The negotiations, the aide said, likely could extend into Sunday.

"They continue to go round and round," the aide said of the negotiations, with ideas constantly in flux.

The aide, who asked not to be identified, said negotiators were discussing the possibility of putting off for a few months the $109 billion in automatic spending cuts due to start on Wednesday. Those cuts would be divided equally between military and non-military programs. It is feared that they could cause severe disruptions inside federal agencies if allowed to occur.

Earlier this week, talk of a temporary delay in the spending cuts was met with derision by some congressional aides.

The extension of the low income tax rates first put in place under Republican former President George W. Bush would also be on a temporary basis, probably one year, the aide said.

No deal had been reached on the most difficult question: Democrats' demand that upper-income earners - families making more than $250,000 a year - see their tax rates go up.

Republicans had been opposed to any rate increase, but lately have signaled a willingness to go along with a higher threshold - and a $400,000 figure has been floating around for days.

Under proposals being discussed, top earners could see their income tax rate rise to 39.6 percent, from the current 35 percent, in order to help tame budget deficits.

The aide added that Republicans still had not agreed to Obama's call for extending long-term unemployment benefits, but that they were demanding some spending cuts to be included in a stop-gap deal.

Disagreements over what to do about low estate taxes that are expiring also had not been worked out, the aide said.

Unless Congress acts, the tax is set to jump on Tuesday - the first day of 2013 - to 55 percent with the first $1 million exempted for individuals. Currently, there is a 35 percent tax and a $5 million exemption.

A Senate Republican leadership aide said that it might not be known until sometime on Sunday whether these talks bear fruit. That is when the leaders are expected to brief their rank-and-file members.

The Senate is scheduled to hold a rare Sunday session beginning at 1 p.m. EST (1800 GMT), but it was not clear whether the chamber would have "fiscal cliff" legislation to act upon.

One Democratic aide was pessimistic that McConnell would come up with a counteroffer that Reid would find acceptable. Such a counteroffer would have to be calibrated in a way that also could attract votes from conservative House of Representatives Republicans, many of whom have balked at tax rate increases on anyone.

'HARD TO SEE'

A senior House Republican aide on Saturday voiced pessimism about prospects for a deal.

"It's hard to see Reid agreeing to anything that can get the votes of the majority of the (Republican) majority in the House, thereby allowing a bipartisan accomplishment," the aide said. A "majority of the majority" refers to the 241 Republicans who are in the 435-member House.

The Republican aide placed the blame squarely on Democrats, as many Republican members have done publicly, saying that going off the "fiscal cliff" is a "policy upside" for them. "Higher taxes, devastating defense cuts. The polls tell them they can win the PR (publican relations) war in January. From their perspective, why stop the cliff dive?"

Democrats, in turn, have publicly accused House Speaker John Boehner, the top Republican in Congress, of preferring to put off any tough "fiscal cliff" votes until after a January 3 House election in which he is expected to win another two-year term as speaker.

If McConnell and Reid can manage to reach a deal on inheritance taxes and raising income tax rates on the wealthiest Americans, they likely would throw into the compromise some other "fiscal cliff" solutions.

Those could include extending an array of other expiring tax breaks such as one that encourages companies to conduct research and development. Also, Congress wants to prevent a steep pay-cut in January for doctors who treat elderly patients under the Medicare health insurance program.

Lawmakers also want to prevent middle-class taxpayers from inadvertently creeping into a higher tax bracket, known as the alternative minimum tax, intended for the wealthiest.

If the Reid-McConnell effort fails, Obama has asked the Senate to hold a vote on Monday on a "basic package" that would stop taxes from going up on the middle class and would extend long-term unemployment benefits that are about to expire. If it passes the Senate, its fate would be in the hands of the Republican-controlled House.

(Additional reporting by Thomas Ferraro and Jeff Mason; Editing by Will Dunham)

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Argentina asks U.S. court to block payouts for debt holdouts

By Nate Raymond and Jonathan Stempel

NEW YORK | Sat Dec 29, 2012 12:44am EST

NEW YORK (Reuters) - Argentina is urging a U.S. appeals court to reverse an order requiring the country to pay $1.33 billion to creditors who did not participate in its two debt restructurings, a legal case that could have huge ramifications for global debt markets.

Lawyers for Argentina's government said in court papers filed late on Friday that a trial judge was "wrong to ignore the chorus of voices" who opposed his November order on payments to so-called "holdout" creditors.

Those payments, to a court-controlled escrow account, would threaten the service of $24 billion in restructured debt, Argentina's lawyers wrote in papers filed in the 2nd U.S. Circuit Court of Appeals in New York.

"There is no authority permitting a U.S. court to order a sovereign to bring its immune assets into the United States in order to 'turn over' or distribute them to its creditors," lawyers for the Argentine government said in the 69-page filing.

The appeals court is expected to decide next year whether to force Argentina to pay the $1.33 billion to investors in the defaulted debt. The decision could have broad impact on the ability of governments to raise money by selling bonds and on strained countries' response to economic crises.

The case stems from Argentina's $100 billion sovereign debt default 11 years ago. Argentina is trying to avoid paying the holdout creditors, who refused to take part in massive debt restructurings in 2005 and 2010.

About 92 percent of the bonds were restructured, giving holders between 25 cents and 29 cents on the dollar.

But the holdouts, led by Elliot Management Corp affiliate NML Capital Ltd and the Aurelius Capital Management funds, demanded to be paid in full. Argentina calls the holdouts "vultures" and has resisted.

The case has run for years in U.S. courts. Oral arguments before the 2nd Circuit on the appeal are set for February 27, 2013.

A decision against Argentina would deal a setback to President Cristina Fernandez, who is trying to avert the fallout of a potential technical default on tens of billions of dollars of debt.

In a statement late on Friday, an NML spokesman said Argentina was well placed to compensate the holdouts, citing its "more than $43 billion in foreign currency reserves" and billions more in other resources.

"Today's filing by the Republic once again demonstrates Argentina's irrational persistence in evading its contractual obligations and the orders of U.S. courts," said Peter Truell, a spokesman for NML.

Also on Friday, the U.S. government filed a friend-of-the-court brief in support of Argentina's bid for the appeals court to reconsider its October ruling that found Argentina had improperly discriminated against bondholders who did not participate in the debt swaps.

The U.S. government said countries needed leverage to garner broad creditor support for a restructuring. It cited the recent debt exchange in Greece as an example of a situation in which holdouts can threaten orderly bond restructurings.

JUDICIAL REPRIEVE

Following the appeals court's October decision, U.S. District Judge Thomas Griesa in Manhattan on November 21 commanded Argentina to put the payments for the holdouts into escrow by December 15.

But on November 28, the 2nd Circuit gave Argentina a reprieve, saying it did not need to make the escrow payment for now.

The battle has even extended to the 2-1/2 month seizure of the Argentine naval vessel ARA Libertad in Ghana at the request of NML. The boat was freed on December 19 following a ruling by an international admiralty tribunal.

In its court papers, Argentina said that if Griesa's orders were allowed to stand, "we may very well see the end of such restructurings and enter an era where debt crises are unresolvable. This will increase litigation, not reduce it."

At the same time, the country's lawyers said Argentina understood the appeals court's desire to resolve the litigation, and "is prepared to do what it can to end it."

Argentina's lawyers said Fernandez was "prepared once again" to ask Argentina's Congress to end the litigation by treating the holdout bondholders the same as those who participated in the 2010 debt swap.

In a separate court filing, lawyers for holders of restructured bonds said that holdouts should not be treated better than "innocent" bondholders who took part in the swaps. The restructured bondholders include funds managed by Gramercy Financial Group LLC and BlackRock Inc (BLK.N), according to the court papers from the group.

The case is NML Capital Ltd et al v. Argentina, 2nd U.S. Circuit Court of Appeals, No. 12-105.

(Reporting by Jonathan Stempel, Nate Raymond and Martha Graybow in New York; Editing by Ron Popeski)

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Housing, factory data point to momentum in economy

A U.S. flag decorates a for-sale sign at a home in the Capitol Hill neighborhood of Washington, August 21, 2012.

Credit: Reuters/Jonathan Ernst

By Lucia Mutikani

WASHINGTON | Fri Dec 28, 2012 1:34pm EST

WASHINGTON (Reuters) - Contracts for U.S. home resales hit a 2-1/2-year high in November and factory activity in the Midwest expanded this month, suggesting some strength in the economy despite the threat of tighter fiscal policy.

The National Association of Realtors said on Friday its Pending Home Sales Index, based on contracts signed last month, increased 1.7 percent to 106.4 - the highest level since April 2010 when the home-buyer tax credit expired.

November marked the third straight month of gains for signed contracts, which become sales after a month or two, and followed a 5 percent increase in October.

A separate report showed the Institute for Supply Management-Chicago business barometer rose to 51.6 in December from 50.4 in November. A reading above 50 indicates expansion in the regional economy. It was the second straight month of growth and was driven by a rebound in new orders.

The data suggested some of the growth momentum from the third quarter carried into the final three months of 2012, even as businesses and households braced for sharp cuts in government spending and higher taxes in the new year.

Data so far in the fourth quarter ranging from consumer spending, housing, employment and the various manufacturing indicators have been fairly upbeat.

"We don't see much evidence that the economy was slowing as we headed into the end of the year, but everything could change on January 1," said John Ryding, chief economist at RDQ Economics in New York.

There are fears that currently stalled budget talks in Washington will fail to steer clear of a $600 billion "fiscal cliff" of less government spending and higher taxes, which could tip the economy back into recession.

"There is nothing here to suggest that the economy has enough momentum to withstand the shock if we go over the fiscal-cliff with no quick return," said Ryding. "The good news right now is it looks like we could have the mid-twos kind of GDP (growth) for the fourth quarter."

STRENGTHENING HOUSING RECOVERY

The economy grew at a 3.1 percent annual rate in the third quarter. The latest Reuters survey of economists put fourth-quarter gross domestic product growth at a 1.2 percent rate, mostly because of superstorm Sandy, which struck the East Coast in late October and fiscal cliff-related cutbacks in business spending.

U.S. financial markets ignored the data as attention remained focused on the developments in Washington surrounding the fiscal cliff.

Stocks on Wall Street fell, putting the Standard & Poor's 500 index on track for a fifth straight day of declines. U.S. Treasury debt prices rose, while the dollar was little changed against a basket of currencies.

Though the employment gauge in the Chicago ISM survey fell to a three-year low in December, economists expected a rebound given the strength in new orders.

"The drop in employment reflects the weakness in new orders in November and to a lesser degree the fiscal cliff. With the bounce back in new orders, employment will also bounce back," said Eric Green, chief economist at TD Securities in New York.

The pending home sales report pointed to a strengthening in the housing market recovery. Contracts were up 9.8 percent in the 12 months through November.

The housing market has turned the corner after a dramatic collapse, which dragged the economy through its worst recession since the Great Depression of the 1930s.

Home sales and prices are rising, encouraging builders to undertake new construction projects. Home resale contracts were up in three of the country's four regions. They were unchanged in the South.

"The housing revival seems to be happening in a way that puts some positive feedback loop, a virtuous cycle into the economy," said Jerry Webman, chief economist at OppenheimerFunds in New York.

(Reporting By Lucia Mutikani; Editing by Neil Stempleman)

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Wall Street Week Ahead: Cliff may be a fear, but debt ceiling much scarier

By Ryan Vlastelica, Edward Krudy and Doris Frankel

Fri Dec 28, 2012 8:34pm EST

n">(Reuters) - Investors fearing a stock market plunge - if the United States tumbles off the "fiscal cliff" next week - may want to relax.

But they should be scared if a few weeks later, Washington fails to reach a deal to increase the nation's debt ceiling because that raises the threat of a default, another credit downgrade and a panic in the financial markets.

Market strategists say that while falling off the cliff for any lengthy period - which would lead to automatic tax hikes and stiff cuts in government spending - would badly hurt both consumer and business confidence, it would take some time for the U.S. economy to slide into recession. In the meantime, there would be plenty of chances for lawmakers to make amends by reversing some of the effects.

That has been reflected in a U.S. stock market that has still not shown signs of melting down. Instead, it has drifted lower and become more volatile.

In some ways, that has let Washington off the hook. In the past, a plunge in stock prices forced the hand of Congress, such as in the middle of the financial crisis in 2008.

"If this thing continues for a bit longer and the result is you get a U.S. debt downgrade ... the risk is not that you lose two-and-a-half percent, the risk is that you lose ten and a half," said Jonathan Golub, chief U.S. equity strategist at UBS Equity Research, in New York.

U.S. Treasury Secretary Tim Geithner said this week that the United States will technically reach its debt limit at the end of the year.

INVESTORS WARY OF JANUARY

The White House has said it will not negotiate the debt ceiling as in 2011, when the fight over what was once a procedural matter preceded the first-ever downgrade of the U.S. credit rating. But it may be forced into such a battle again. A repeat of that war is most worrisome for markets.

Markets posted several days of sharp losses in the period surrounding the debt ceiling fight in 2011. Even after a bill to increase the ceiling passed, stocks plunged in what was seen as a vote of "no confidence" in Washington's ability to function, considering how close lawmakers came to a default.

Credit ratings agency Standard & Poor's lowered the U.S. sovereign rating to double-A-plus, citing Washington's legislative problems as one reason for the downgrade from triple-A status. The benchmark S&P 500 dropped 16 percent in a four-week period ending August 21, 2011.

"I think there will be a tremendous fight between Democrats and Republicans about the debt ceiling," said Jon Najarian, a co-founder of online brokerage TradeMonster.com, in Chicago.

"I think that is the biggest risk to the downside in January for the market and the U.S. economy."

There are some signs in the options market that investors are starting to eye the January period with more wariness. The CBOE Volatility Index, or the VIX, the market's preferred indicator of anxiety, has remained at relatively low levels throughout this process, though on Thursday it edged above 20 for the first time since July.

More notable is the action in VIX futures markets, which shows a sharper increase in expected volatility in January than in later-dated contracts. January VIX futures are up nearly 23 percent in the last seven trading days, compared with a 13 percent increase in March futures and an 8 percent increase in May futures. That's a sign of increasing near-term worry among market participants.

The CBOE Volatility Index closed on Friday at 22.72, gaining nearly 17 percent to end at its highest level since June as details emerged of a meeting on Friday afternoon of President Barack Obama with Senate and House leaders from both parties where the president offered proposals similar to those already rejected by Republicans. Stocks slid in late trading and equity futures continued that slide after cash markets closed.

"I was stunned Obama didn't have another plan, and that's absolutely why we sold off," said Mike Shea, a managing partner and trader at Direct Access Partners LLC, in New York.

Obama offered hope for a last-minute agreement to avoid the fiscal cliff after a meeting with congressional leaders, although he scolded Congress for leaving the problem unresolved until the 11th hour.

"The hour for immediate action is here," he told reporters at a White House briefing. "I'm modestly optimistic that an agreement can be achieved."

The U.S. House of Representatives is set to convene on Sunday and continue working through the New Year's Day holiday. Obama has proposed maintaining current tax rates for all but the highest earners.

Consumers don't appear at all traumatized by the fiscal cliff talks, as yet. Helping to bolster consumer confidence has been a continued recovery in the housing market and growth in the labor market, albeit slow.

The latest take on employment will be out next Friday, when the U.S. Labor Department's non-farm payrolls report is expected to show jobs growth of 145,000 for December, in line with recent growth.

Consumers will see their paychecks affected if lawmakers cannot broker a deal and tax rates rise, but the effect on spending is likely to be gradual.

PLAYING DEFENSE

Options strategists have noted an increase in positions to guard against weakness in defense stocks such as General Dynamics because those stocks would be affected by spending cuts set for that sector. Notably, though, the PHLX Defense Index is less than 1 percent away from an all-time high reached on December 20.

This underscores the view taken by most investors and strategists: One way or another, Washington will come to an agreement to offset some effects of the cliff. The result will not be entirely satisfying, but it will be enough to satisfy investors.

"Expectations are pretty low at this point, and yet the equity market hasn't reacted," said Carmine Grigoli, chief U.S. investment strategist at Mizuho Securities USA, in New York. "You're not going to see the markets react to anything with more than a 5 (percent) to 7 percent correction."

Save for a brief 3.6 percent drop in equity futures late on Thursday evening last week after House Speaker John Boehner had to cancel a scheduled vote on a tax-hike bill due to lack of Republican support, markets have not shown the same kind of volatility as in 2008 or 2011.

A gradual decline remains possible, Golub said, if business and consumer confidence continues to take a hit on the back of fiscal cliff worries. The Conference Board's measure of consumer confidence fell sharply in December, a drop blamed in part on the fiscal issues.

"If Congress came out and said that everything is off the table, yeah, that would be a short-term shock to the market, but that's not likely," said Richard Weiss, a Mountain View, California-based senior money manager at American Century Investments.

"Things will be resolved, just maybe not on a good time table. All else being equal, we see any further decline as a buying opportunity."

(Wall St Week Ahead runs every Friday. Questions or comments on this column can be emailed to: david.gaffen(at)thomsonreuters.com)

(Reporting by Edward Krudy and Ryan Vlastelica in New York and Doris Frankel in Chicago; Writing by David Gaffen; Editing by Martin Howell, Steve Orlofsky and Jan Paschal)

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Boeing, Textron win $1.4 billion deal for 21 V-22 Opreys: Pentagon

WASHINGTON | Fri Dec 28, 2012 8:05pm EST

WASHINGTON (Reuters) - Boeing Co (BA.N) and Bell Helicopter, a unit of Textron Inc (TXT.N), have won a contract valued at $1.4 billion for 21 V-22 tiltrotor Osprey aircraft, the U.S. Defense Department said on Friday.

In a daily digest of major weapons contracts, the Pentagon said it had modified an existing advanced procurement contract with the Bell-Boeing joint venture to cover production of the additional aircraft.

The contract also includes funding for advanced procurement of materials for 22 additional aircraft to be funded in fiscal year 2014, which begins next October.

(Reporting by Andrea Shalal-Esa; Editing by Richard Chang)

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Retail sales down in week before Christmas: ShopperTrak

n">(Reuters) - U.S. retail sales fell 2.5 percent last week from a year earlier as fewer people visited stores, retail tracking firm ShopperTrak said on Thursday, the latest signal that this holiday season's growth may not be as robust as some had anticipated.

ShopperTrak, which monitors the number of people walking into stores across the United States, said foot traffic fell 3.3 percent in the week ended December 22 from last year.

However, sales increased 39.1 percent and traffic rose 32.0 percent compared to the previous week, as procrastinators rushed to finish last-minute shopping, ShopperTrak said.

Last week, ShopperTrak lowered its holiday season forecast, calling for sales in November and December to increase only 2.5 percent from 2011, down from 3.3 percent.

The Saturday before Christmas, December 22, was the second-busiest retail sales and foot traffic day of the year, behind Black Friday on November 23, the traditional start of the holiday shopping season, ShopperTrak said.

Shopping on the day after Christmas probably was not as strong this year as it was in 2011, ShopperTrak said. This year, December 26 fell on a Wednesday, and many people likely were back at work. Last year, the day after Christmas came on a Monday.

In contrast, data released by IBM Benchmark showed online sales on December 26 rose 40.4 percent over 2011 and that Apple Inc's (AAPL.O) iPad drove more retail shopping than any other device.

Traffic via iPad was at 10 percent versus 8.8 percent and 5.7 percent for Apple's iPhone and Google Inc's (GOOG.O) Android platform respectively, according to the findings by IBM Benchmark, which analyzes data from 500 retailers nationwide.

(Reporting by Nivedita Bhattacharjee in Chicago; Editing by Dale Hudson)

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Long-suffering Bankia shareholders set for more losses

People are reflected on the windows of the headquarters of Spain's Bankia bank in Madrid November 28, 2012.

Credit: Reuters/Andrea Comas

By Julien Toyer and Sonya Dowsett

MADRID | Thu Dec 27, 2012 12:07pm EST

MADRID (Reuters) - Spain's Bankia will wipe out the investments of 350,000 shareholders, many of them small savers and pensioners, after it emerged that losses on bad loans at the troubled bank were even worse than expected.

The measure will hit small investors drawn in by aggressive marketing just last year after Bankia was formed from a merger of provincial savings banks. But it is described by officials as vital if the company, which was nationalized in May, is to return to profit in order to be sold on again.

Bankia will receive 18 billion euros of European Union money by Friday and launch a capital increase in the first half of January when current shareholders will lose practically their entire investment, a source close to the Bank of Spain said.

"Are we looking into leaving shareholders with something? Yes. How much? That's too soon to say. Will it be very little? For sure," the central bank source said on condition of anonymity.

"But that will be purely symbolic. I can assure you they will lose up to the shirt on their back."

Under the EU plan to prop up Spain's banking sector, devastated by a burst real estate bubble, shareholders must be the first in line to accept losses. That was the case in Ireland, another victim of the global credit crisis, where shareholders in Anglo Irish Bank were left with nothing.

Bankia had negative equity - or an excess of debt over assets - of 4.2 billion euros, Spain's bank rescue fund, known as FROB, said on Wednesday. That measure will be used to help determine shareholder losses. Bankia's parent company BFA had negative equity of 10.4 billion euros.

How much shareholders will lose will be unveiled when the capital increase takes place in January following discussions with EU authorities, the source said.

"A TOTAL COCK-UP"

Hundreds of thousands of Spaniards, some of them retirees with little awareness of financial affairs, ploughed savings into Bankia shares when the bank was listed in July 2011. The stock has lost more than 80 percent of its value since then.

Small savers also bought billions of euros of other Bankia instruments, such as preference shares or subordinated debt, on which they will also suffer steep losses.

"It seems to be to have been managed extraordinarily badly. It is a total cock-up," said Enrique Marquez, 66, a retired technician who invested 7,000 euros in ordinary shares and more than 70,000 euros in preference shares with Bankia.

"I've been duped on the preference shares and I've been duped on the ordinary shares. It's been an abuse of trust," added Marquez, who said he had been told by his bank manager the stock could be very profitable in the medium term.

Many of Bankia's more than 20,000 employees also invested in the shares in the 2011 initial public offering and are set to lose their money even as thousands face job cuts enforced as a condition of receiving European aid.

Speaking of his fellow staff at Bankia, one employee at a branch in northern Spain said: "I don't know anyone who didn't buy the shares. I did and my family heavily invested in them too." He spoke anonymously and said he now feared for his job.

About 6,000 workers will be axed in Bankia's restructuring while remaining employees are being asked to take a 40- to 50-percent pay cut, trade unions said.

Shares in Bankia fell a further 16 percent to 0.58 euros on Thursday after the FROB disclosure of its negative equity. Bankia will be taken out of Spain's blue-chip index, the Ibex 35 .IBEX, as of January 2, the stock exchange said on Thursday.

SLIMMED DOWN, SOLD OFF

Bankia must reduce its balance sheet by 60 percent over the next five years as a condition of receiving aid.

Bankers say the lender could be put up for sale after it is slimmed down and stripped of its toxic property assets, which will be siphoned off into a special vehicle, or 'bad bank'.

However, the lender, which accounts for around 10 percent of Spain's banking market, is probably too big to be swallowed by a larger rival, as other state-rescued lenders have been: "The large Spanish banks would struggle to take on something of that size," one Madrid-based investment banker said.

Bankia is unlikely to be sold until around 2017, bankers said. Around 10 percent of a stabilized market, flush with rescue cash and stripped of toxic real estate assets, may be an attractive investment proposition for a foreign bank, they said.

Another possibility for the government to extricate itself from Bankia would be a public share offering, bankers said, although they admitted Spain would have to wait so any sales operation wouldn't come too soon after the ill-fated 2011 IPO.

Separately, the FROB also announced it would take over 99.9 percent of Banco de Valencia before it is sold to CaixaBank (CABK.MC), while shareholders in other nationalized lenders NCG Banco and Catalunya Banc will be fully wiped out.

In the case of Anglo Irish Bank (AIB), shareholders whose equity was once worth 13 billion euros were left with nothing following the bank's 4-billion-euro recapitalization and immediate nationalization in January 2009.

AIB ultimately needed another 25.3 billion euros of state money, which was funded by a "promissory note", or government IOU, that Ireland is now trying to restructure.

Spain's four nationalized lenders will receive a total of 37 billion euros of EU funds. It will also tap another 4.4 billion euros to set up the 'bad bank' and recapitalize smaller banks. ($1 = 0.7563 euros)

(Additional reporting by Laura Noonan in Dublin and Sarah White in London; Editing by Giles Elgood and Alastair Macdonald)

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