EU finance ministers prepare for Spanish bailout

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EU finance ministers prepare for Spanish bailout

Updated June 09, 2012 22:13:09

Spain is widely expected to ask the International Monetary Fund on Saturday afternoon (local time) for a bailout from the eurozone’s rescue fund.

Spain would become the fourth country to request financial aid since the start of Europe’s sovereign debt crisis two years ago.

However, a Spanish government official reiterated on Saturday that there “had been no change” and Spain would not be asking for a bailout.

Eurozone finance ministers are set to discuss the possibility of bailing out the Spanish economy during a conference call at 2:00pm (GMT), with a request for financial aid expected “any time now” according to European government sources.

Finance ministers will discuss a “declaration on Spain’s intention to request aid and the [eurozone’s] commitment to granting it,” one European government official said.

The conference call comes after the IMF announced on Friday that Spain’s weakest banks need at least 40 billion euros in new capital.

However, the IMF warned the amount would not be enough to cover other costs, and some experts have suggested a bailout in the order of 200 billion euros will be needed.


Spain’s deputy prime minister Soraya Saenz de Santamaria said on Friday that the government would wait for the results of an IMF report and two independent audits into Spanish banks’ recapitalisation needs before making a decision.

US president Barack Obama has called on European leaders to act quickly to stabilise the European financial system.

The head of Germany’s central bank, Jens Weidmann, is pressing Spain to seek a bailout for its troubled banks from the eurozone’s current rescue fund, the European Financial Stability Facility (EFSF).

“If Spain feels overwhelmed by its financial needs, it should use the instruments which have been created for that,” Mr Weidmann said in an interview for the weekly Welt am Sonntag newspaper.

“The motto must not be: above all no rescue funds. Hoping for central bank aid to avoid fulfilling one’s responsibilities is a bad move.”

Stress tests

Meanwhile, stress tests performed by the IMF on Spain’s battered banking sector have indicated the top two banks, BBVA and Banco Santander, were solid.

But the rest of the banking sector could not measure up to official banking capitalisation standards in the case of a sharp continuing contraction of the Spanish economy.

“Under the adverse scenario, the largest banks would be sufficiently capitalised to withstand further deterioration, while several banks would need to increase capital buffers by about 40 billion euros in aggregate to comply with the Basel III transition schedule,” the IMF said in a statement on Friday.

But that would not be enough to cover other restructuring costs and loan portfolio downgrades, the statement said.

Speaking on the condition of anonymity, an IMF official said the banks would likely need a lot more to ensure there was a “credible backstop” in worst-case scenarios.

“In our view the stress tests are a good indicator but they are basically a floor for what you would probably need,” the official said.

Often, the official said, in order to convince markets of the strength of the banks they would need a buffer of one-and-a-half to two times the level of new capital mandated under the stress test.

“Usually you come up with a buffer … large enough to convince markets so that people don’t say, ‘Oh well, what if this happens, what if the growth is even worse?'”

The stress test results were originally scheduled to be released on Monday, but were moved ahead as European diplomats said Spain would likely move Saturday to begin crafting a deal for an EU rescue of its banks.

Alberto Gallo, a senior strategist at the Royal Bank of Scotland, told Saturday AM the lifeline might need to be as much as $230 billion in additional capital.

“If Spain asks for external help, this external help will come with strong conditionality, similar to what happened in Greece or in Ireland,” he said.

“It would be very hard for Spain to make an exception.

“However, more generally, I think the core European countries, the IMF as well, is shifting its stance a little bit more towards growth, which is also what’s needed, not only austerity and I think that should be something that they would have to do over the next month also.”


Topics:international-financial-crisis, banking, economic-trends, world-politics, spain

First posted June 09, 2012 20:53:04

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