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Investigations into Spain's bailed-out Bankia are descending into the political nightmare top parties had sought to avoid, with a fraud probe set to lay bare their role in a banking mess that has crippled the country.

A Spanish court this week opened a fraud case against former Bankia executives, including ex-chairman Rodrigo Rato, a one-time IMF chief and Spanish government minister, putting regulators and the Bank of Spain under scrutiny too.

The 23.5 billion euro ($29.4 billion) state rescue of Bankia in May, which pushed Spain to request European aid for its banks, was already embarrassing for mainstream political parties with deep ties to the lender and its former management.

Bankia was formed from seven regional savings banks, including heavyweight Caja Madrid and Valencian-based Bancaja, in 2010 as part of a government-driven programme to reduce the number of Spain's unlisted savings banks, or 'cajas'.

Many board members at Spain's cajas either had connections to political parties or had served in government, and drove investment decisions during the country's boom years that eventually turned to bust.

"It was a decades-long intermingling of local, political and business interests that was systematic in many regions," said David Bach of the IE Business School in Madrid. "Many of the failed investments were driven by political agendas: the cultural centres, the regional airports."

Bankia's own ties with the centre-right People's Party (PP) now in power could come back to embarrass the government of Prime Minister Mariano Rajoy.

Rato, ousted shortly before Bankia's state takeover, is a PP stalwart - a former finance minister when the party was last in government who commands influence with ministers in power now.

He took over as head of Caja Madrid in 2010 from Miguel Blesa, a friend of former PP prime minister Jose Maria Aznar, and was the natural choice to head the merged group when Bankia was formed later that year.

Rato ran head to head with current Economy Minister Luis de Guindos for the top Caja Madrid position, and there is no love lost between the two men, a former colleague of Rato at Bankia said.

Rato oversaw Bankia's stock market listing in July 2011, when thousands of ordinary Spaniards were encouraged to buy shares, only to see their investments virtually wiped out as worries about the bank's health battered the share price.

Some PP members made a show of support for Rato after the accusations, playing down the significance of the case. "He should know that friendship and personal relationships
don't change because of these things," Spanish foreign minister Jose Manuel Garcia Margallo said on Thursday.

The PP had already quashed calls for a parliamentary investigation into the Bankia bailout, but a judge opened the case after a small political party brought a claim. (In Spain, judges have investigative powers similar to prosecutors in other legal systems.)

After God, Bankia

The judicial investigation could be damaging for socialists in opposition too. Like the PP, they had several ex-party mayors and councillors on the board of Bankia that are under investigation.

The Socialist government drove the tie-up between the seven banks to form Bankia. The pairing of Caja Madrid with Bancaja - loaded with rotten loans to real estate developers along Spain's Mediterranean coast - now clearly appears to have been a mistake, said two former Bankia board members.

The Socialists were also in power when Bankia embarked on an aggressive marketing campaign on television and in bank branches designed to persuade citizens to buy the stock in the July 2011 initial public offering.

The plight of small shareholders has become the source of much public anger, a nd claims by a group of 400 of these investors will be added to the judicial fraud investigation in coming days, according to law firm Cremades & Calvo-Sotelo.

Some of these investors claim they were not adequately warned of the risks when they were sold shares in Bankia – a process the Bank of Spain, headed at the time by a Socialist party member, should have at least in part been overseeing.

"They told us that after God, there was nothing better in the world than Bankia shares," said Roberto Oscar Vetere, 59, who invested about 3,000 euros in Bankia stock on the advice of his local bank manager in Valencia.

Vetere, an Argentinian who fled his own country's banking problems 10 years ago, said he blamed politicians and the bank's executives for Bankia's woes, but said he was not interested in seeing them behind bars. "I want to see them face up to people and say 'we got it wrong'", he said.

Bankia shares have fallen 76 percent since listing. The sales process around the initial public offering will probably be a key part of the probe. International investment banks that advised on the sale have so far not been dragged into the case, although scrutiny is growing on their role too.