Spain is poised to become the fourth of the 17 euro-area countries to require emergency assistance as the currency bloc's finance chiefs plan weekend talks on a potential aid request to shore up the nation's lenders.
A bid for help may come as soon as tomorrow when euro finance ministers hold a conference call, said a German government official and a European Union aide, each of whom declined to be identified because the matter is confidential.
The prospect of action underscores officials' concerns amid speculation that Greece may be forced out of the euro and as Spain struggles to persuade markets it can protect troubled banks and finance its budget deficit. The country's credit rating was cut three grades by Fitch Ratings yesterday and Prime Minister Mariano Rajoy said for the first time he's discussing with European leaders how to help Spanish banks.
“I don't think the Spanish bailout will be enough, it's only one piece of the jigsaw,” Nick Kounis, head of macroeconomic research at ABN Amro NV, said on Bloomberg Television. “We need a wider plan which puts forward far-reaching institutional change, a banking union, a fiscal union, and they are working on such a plan, but questions remain.”
Spain's deputy minister for communications, Carmen Martinez Castro, declined to comment.
Fitch downgraded Spain to BBB, within two steps of non-investment grade. It said the cost to the state of shoring up banks may amount to as much as 100 billion euros ($126 billion) in the worst case, compared with its previous estimate of 30 billion euros, as Spain will remain in recession next year.
Rajoy has said he wants to overcome German opposition to allowing the euro region's bailout funds to sidestep governments and recapitalize lenders directly. The Treasury's access to capital markets is narrowing as it increasingly depends on domestic banks to buy its bonds, reducing the government's ability to backstop struggling lenders.
If there is a Spanish aid request, “it will follow the usual procedure: a state files an application, it accepts liability and is bound to conditions,” German government spokesman Steffen Seibert said. “The decision whether that's the Spanish way will be taken by the Spanish government.”
Spanish Yield
Pressure is building on Spain to take some kind of bailout. European Central Bank Governing Council member Ewald Nowotny said today that any delay by the nation in requesting aid would increase the costs of a rescue.
While declining to comment on rumors that Spain may ask for help this weekend, Nowotny said that he “of course considered it sensible to request aid, because the longer you wait with revamp measures, the more expensive it gets.”
Spain's 10-year bond yields rose to 6.169 percent today from 6.088 percent yesterday, moving back toward the 7 percent threshold that triggered bailouts in Greece, Ireland and Portugal. The Treasury met its issuance goal at a bond auction yesterday, selling 2.07 billion euros of securities, surpassing the maximum target of 2 billion euros.
“The collateral quality of Spanish government bonds is shrinking fast,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said by phone. “All Spanish banks are in desperate need of cheap ECB money. If they didn't have that flow of funds they would all go bust which is why the situation now is really, really urgent.”
Rajoy said yesterday he wouldn't give estimates on how much capital the nation's lenders need until he has results from stress-test reports by consultants Roland Berger and Oliver Wyman, due in the second half of June, and from the International Monetary Fund, which the government says will be published on June 11.
“After that I will give my figure and the government will say what the financial system needs to be recapitalized,” he told a news conference in Madrid with the Dutch premier, Mark Rutte. “I've been talking to my European Union colleagues and to Prime Minister Rutte to take a decision on this matter.”
Spanish banks may need as much as 100 billion euros in aid, which could be funneled through the nation's bank-bailout fund, Antonio Lopez Isturiz, the general secretary of the European People's Party, said in an interview with TVE in Madrid yesterday. The EPP brings together the national parties of both Rajoy and German Chancellor Angela Merkel. Lopez Isturiz used to work with former Spanish Prime Minister Jose Maria Aznar.
Standard & Poor's said yesterday its “base-case scenario” has Spanish banks showing loan losses of 80 billion euros to 112 billion euros this year and next. Fitch said government support of 60 billion euros for the banks would help push the nation's debt load to 95 percent of gross domestic product in 2015. Spain went into the crisis with a debt-to-GDP ratio of 36 percent in 2007.
Bloomberg News
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