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Spain awaits Moody's cut

Source: Reuters - Mon 25th Jun 2012
Spain awaits Moody's cut

Spain formally requested European aid for its indebted banks on Monday but the lack of details rekindled investor doubts over the financial sector, hours before Moody's was expected to cut the ratings of all Spanish lenders.

Two financial sources told Reuters the Moody's downgrade, which follows a June 13 downgrade of Spain's sovereign rating by 3 notches, was likely to happen on Monday night.

In a letter to Eurogroup Chairman Jean-Claude Juncker sent early on Monday, Spanish Economy Minister Luis de Guindos said he wanted to take up the EU offer of up to 100 billion and hoped to finalise the package by July 9.

He did not specify how much money Spain will seek to recapitalize the indebted lenders and said the final amount and conditions of the assistance were still under discussion.

Spanish banking stocks fell 2.6% in afternoon trade slightly underperforming the blue-chips index IBEX, which was off 2.5%. And Spain's country risk, as measured by the spread between German and Spanish benchmark bonds, rose to 504 basis points.

De Guindos said an independent audit of the banking sector released last Thursday would be used as a starting point to determine the capital needs, to which an additional security buffer will be added.

The audit showed Spanish banks, badly hit by a property crash 4 years ago, need up to 62 billion euros to weather a severe economic downturn.

Analysts say the euro zone's 4th largest economy, which has become the focus of the debt crisis, will struggle to get out of recession unless the banking problems are solved.

According to financial and government sources, 4 nationalized banks - Bankia, CatalunyaCaixa, NovaGalicia and Banco de Valencia - will get the bulk of the aid. These banks could need a cash injection of around 40 billion as soon as July, the sources said.

The bailout mechanism - European Stability Mechanism or European Financial Stability facility - which will be used to raise the money will be chosen at a later stage.

This question is important because the ESM has a preferred debtor status which would push private bondholders down the queue for repayment of their investments.

NO LOSSES FOR BONDHOLDERS

Luxembourg's PM, Jean-Claude Juncker, who chairs monthly meetings of euro zone finance ministers, said he had received the request and would give an answer "in due course".

"We expect to give a mandate to the Commission, in liaison with the ECB and the EBA, to negotiate the necessary policy conditionality for the financial sector, including restructuring plans in accordance with EU state aid rules, which shall accompany the financial assistance," he said in a statement.

The European Commission usually requires banks which receive aid to sell assets, close branches and restructure.

This would however not involve imposing losses on banks' bondholders, something De Guindos ruled out on Friday.

Secretary of State for Economy Fernando Jimenez Latorre said on Monday the aid should reach the banks within three or four months and that transitory liquidity mechanisms would be used for the entities which require a lifeline earlier.

"In the next weeks, we will clear doubts about the seniority of the European aid, the conditions for the credits, the maturity, if it will affect the deficit," he said.

He added that the possibility of channeling the European aid directly to the banks was still an option. The request letter however said Spain's bank restructuring fund, known as the FROB, would receive the money and distribute it to the lenders.

DIRECT AID ?

Documents released on Friday after the independent audit showed Spain will carry out yet another stress test of its banks by October with a focus on seven lenders that might not need aid right away but could still be vulnerable.

Doing the extra test gives Spain at least two more months to negotiate for direct recapitalisation of the banks. The government wants to avoid taking on the aid itself and then channeling it to the banks, which would affect the public debt, potentially ramping up borrowing costs and dragging it further into the debt crisis.

Foreign Minister Jose Manuel Garcia-Margallo said on Monday that Spain would insist in having long maturities and low interest rates on the loans. He also said direct European aid for the banks was still an option.

"The question of whether the aid is given directly to the banks remains open. This question was discussed in Rome between the 4 European leaders and no solution has been found yet," he said in Luxembourg, on the sidelines of a meeting of European Union foreign ministers.

Spain has escaped conditionality for its economic policy in return for the financial assistance but it will be placed under increased scrutiny from its EU partners.

"The way Spain complies with any and all of its commitments will be looked at with more attention than for a country which has not sought financial assistance," said EU competition chief Joaquin Almunia on Monday.

Almunia will be in charge of supervising the restructuring of the banking sector and maintaining a level playing field with other lenders in Europe which did not receive state aid.