Spain to request EU bank aid on Saturday

 

Spain is expected to ask the euro zone for help with recapitalising its stricken banks at the weekend, EU and German sources said on Friday, becoming the fourth country to seek assistance since Europe's debt crisis began.

Five officials in Brussels and Berlin said the finance ministers of the single currency area would hold a conference call on Saturday morning to discuss a Spanish request for aid, although no figure on the assistance has been set.

The Eurogroup, which comprises the 17 euro zone states, will issue a statement after the call, which is scheduled to take place before midday (1000 GMT), the sources said.

"The announcement is expected for Saturday afternoon," one of the EU officials said.

The dramatic move comes after Fitch Ratings cut Madrid's sovereign credit rating by 3 notches to BBB on Thursday, highlighting the Spanish banking sector's exposure to bad property loans and to contagion from Greece's debt crisis.

"The government of Spain has realised the seriousness of their problem," a senior German official said.

He added that an agreement had to be reached before a Greek general election on June 17 which could cause market panic and increase the possibility of Athens leaving the euro zone if parties opposed to the terms of an EU/IMF bailout win.

The EU and German sources spoke on condition of anonymity due to the sensitivity of the matter.

The European Commission's spokesman on economic affairs said Spain had made no request for aid and he would not confirm that a conference call was planned. But he added that if Spain did make a request, the euro zone had instruments ready to use.

"If such a request were to be made, the instruments are there, ready to be used, in agreement with the guidelines agreed in the past," Amadeu Altafaj said. "We are not at that point."

Speaking in Berlin, German Chancellor Angela Merkel said she was not pressing any country into taking a bailout, saying it was up to Spain to decide what it wanted to do: "It's down to the individual countries to turn to us," she said.

"That has not happened so far, and therefore (we) will not exert any pressure."

In Madrid, where the Spanish cabinet was holding its weekly meeting, a government spokeswoman said she was not aware of any pending announcement on a bank rescue. She recalled that Prime Minister Mariano Rajoy said on Thursday he would await the outcome of two external audits later this month before talking about how to recapitalise troubled lenders.

Spain is expected to request aid from the euro zone's €440 billion euro bailout mechanism, known as the European Financial Stability Facility. The amount will depends on the results of audits being conducted by the IMF and 2 independent assessors.

Financial industry sources told Reuters on Thursday that a report by the IMF, to be handed to Spain on Friday and expected to be made public on Monday, had estimated Spanish banks' minimum capital needs at €40 billion euros, rising to €90 billion for a fuller recapitalisation.

A separate independent audit of the banking sector, commissioned from consultants Oliver Wyman and Roland Berger, which the government had flagged as crucial, is due on June 21.

The euro zone has been under strong pressure from the United States, China, Canada and other major partners to take swift, decisive action to prevent the debt crisis spreading and causing greater damage to the world economy.

Fitch said the cost to the Spanish state of recapitalising banks stricken by the bursting of a real estate bubble, recession and mass unemployment could be between €60-100 billion - or 6 to 9% of Spain's GDP.. The higher figure would be in a stress scenario equivalent to Ireland's bank crash.

BAILOUT LITE ?

European shares and the € fell amid mounting concern over Spain following the Fitch downgrade. Spanish bond yields rose after the steep credit rating cut.

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 3 years plus possible additional assistance for Portugal and Ireland.

"I think they're trying to get a lighter support package, where the money is headed to the banks and not for financing the fiscal deficit," said Vincent Chaigneau, head of rates strategy at Societe Generale. "But you need to know the details, the size of the programme and who participates."

While funds would be paid to Spain from the EFSF, it remains unclear whether they will go directly to the Spanish state or to the government's bank assistance fund known as the FROB. Either way, analysts say the aid will accrue to Spain's budget deficit.

The sudden escalation of the Spanish banking crisis, dramatised by last month's hasty nationalisation of troubled lender Bankia, has contributed to raising Italy's borrowing costs towards danger levels.

The deputy governor of the Bank of Spain told parliamentarians on Thursday that €9 billion would also be needed to cover additional losses at nationalised banks CatalunyaCaixa and NovaGalicia, according to one source.

SPANISH PRIDE

The aim of a European bank rescue package would be to relieve pressure on the state and enable it to keep borrowing on the markets.

A "bailout lite" would also 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 prickly national pride as a barrier to requesting a full assistance programme.

Any political conditions would be light, 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.

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% of GDP because of a deep recession.