A Spanish plan to recapitalise Bankia, the troubled lender, in a manner that ultimately used the European Central Bank as the supplier of cash was bluntly rejected as unacceptable by the ECB, European officials said.

The censure of the plan comes as Spain faces elevated borrowing costs in the bond markets and is attempting to persuade investors it can contain problems in a banking sector weighed down by €180bn of bad property loans. Yesterday, the country saw its central bank governor stand down early.

Madrid had floated the unorthodox idea over the weekend of recapitalising Bankia by injecting €19bn of sovereign bonds into its parent company, which could then be swapped for cash at the ECB’s three-month refinancing window, avoiding the need to raise the money on bond markets. The ECB told the Spanish government a proper capital injection was needed for Bankia and that its plans were in danger of breaching the EU ban on “monetary financing”, or central bank funding of governments, according to two European officials.