Euro zone ministers to consider Spanish bailout

It is not clear if bailout numbers will be finalised, but IMF said under a stress scenario a number of Spanish banks would need to increase capital by 40 billion euros ($50 billion) in total. It advised seeking more than that.

Justyna Pawlak and Erik Kirschbaum The euro zone’s senior finance minister urged a rapid resolution of Spain’s debt crisis recently, before a meeting where he will lead discussions on a bailout of the country’s teetering banks.

Several senior EU sources said that Madrid was expected to ask the currency bloc for help with recapitalizing its banks this weekend, becoming the fourth country to seek assistance since Europe’s debt crisis began.

“There will have to be a quick solution,” Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, told German radio.

He added that Spain’s troubles were not comparable to those of Greece, since they were essentially limited to its banks. It is not clear whether bailout numbers will be finalised, but the International Monetary Fund gave a clear guide to what it thought was needed, saying that under a stress scenario a number of Spanish banks would need to increase capital by 40 billion euros ($50 billion) in total. It advised seeking more than that.

“Going forward, it will be critical to communicate clearly the strategy for providing a credible backstop for capital shortfalls, a backstop that experience shows it is better to overestimate than underestimate,” Ceyla Pazarbasioglu, Deputy Director of the IMF’s Monetary and Capital Markets Department, said in a statement.

Euro zone policymakers are eager to shore Spain’s position up before June 17 elections which could push Greece closer to a euro zone exit and unleash a wave of contagion.

Madrid had said it would wait for the IMF audit and a separate report due by June 21 from two independent assessors, Oliver Wyman and Roland Berger before acting.

But officials in Spain said the parameters for the IMF and the private-sector audits were effectively the same, meaning Spain could make the request for aid on the basis of the IMF figures rather than having to wait for the other assessment.

Spanish Prime Minister Mariano Rajoy held talks with socialist opposition chief Alfredo Perez Rubalcaba.

“They’ve talked in the last hours. I don’t know the content of that conversation, but yes they did talk,” socialist member of parliament Eduardo Madina told Cadena Ser radio.

Bundesbank president Jens Weidmann said Spain should turn to the European Financial Stability Facility (EFSF) rescue fund if it could not afford the bank recapitalisation bill.

In an interview to Welt am Sonntag newspaper, Weidmann said: “If Spain sees itself overwhelmed by financing needs, it should use the instruments that were created for that.”

The ECB could not be expected to fill a policy vacuum, he said. The bank’s Vice-President, Vitor Constancio, said he hoped the call for assistance from Madrid would come swiftly.


EFSF Funds

The race to resolve the banks’ troubles comes after Fitch Ratings cut Madrid’s sovereign credit rating by three notches to BBB recently, highlighting the Spanish banking sector’s exposure to bad property loans and to contagion from Greece’s debt crisis.

It said the cost to the Spanish state of recapitalizing banks stricken by the bursting of a real estate bubble, recession and mass unemployment could be between 60-100 billion euros ($75-$125 billion) - or 6 to 9 percent of Spain’s gross domestic product.

The higher figure would be in a stress scenario equivalent to Ireland's bank crash.
If a request is made, Spain is expected to ask for help from the 440 billion euros EFSF.

The process is likely to involve bonds from the EFSF being injected into Spanish banks with no new capital raised, a euro zone official said. The bonds can then be used as collateral, allowing the banks to access ECB liquidity.

While Spain would join Greece, Ireland and Portugal in receiving a European financial rescue, officials said the aid would be focused only on its banking sector, without taking the Spanish state out of credit markets.

That would be crucial to avoid overstraining the euro zone’s rescue funds, which would struggle to cover Spanish government borrowing needs for the next three years plus possible additional assistance for Portugal and Ireland.

Conditions in the plan would be related to the banks and would probably not add to the austerity measures and structural economic reforms which Rajoy’s government has already put in place, EU and German sources said.

A “bailout lite” would help salve Spanish pride. Spain is the world’s 12th largest economy and No 4 in the euro zone. EU and German officials have cited national pride as a barrier to requesting a full assistance programme.

The European Commission and Germany both agreed in principle last week that Spain should be given an extra year to bring its budget deficit down below the EU limit of 3 per cent of gross domestic product because of a deep recession.