Economic Calendar

Sunday, June 10, 2012

Spanish Bank Aid Request Seen as Moody’s Cautions

By Emma Ross-Thomas and Charles Penty - Jun 10, 2012 12:16 AM GMT+0700

Spain may today move closer to becoming the fourth euro-area nation to receive aid, as the International Monetary Fund said the country’s banks need at least 37 billion euros ($46 billion) to bear a weaker economy.

Euro-region finance ministers held an almost three-hour conference call on Spain today, and Spanish Economy Minister Luis de Guindos will brief reporters at 7:30 p.m. in Madrid. The eurogroup will also issue a statement on the call, said a European official who declined to be named. European Central Bank Vice President Vitor Constancio said yesterday that a Spanish request for a bank bailout is “awaited.”

Mariano Rajoy, Spain's prime minister. Photographer: Jock Fistick/Bloomberg

Spain may receive as much as 100 billion euros ($126 billion) in a rescue of its banks, El Mundo reported on its website today.

The IMF released a report overnight disclosing its estimate for the extra capital Spain’s banks need to cope with a worsening economy. Spain may need to go beyond the 37 billion euros of capital needs identified and build a buffer of 60 billion euros to 80 billion euros, an official at the Washington-based IMF, who declined to be named, told reporters.

Prime Minister Mariano Rajoy has been resisting pressure from European officials to accelerate any request for help as Greek elections loom and Spain’s access to markets narrows. He said June 7 he won’t take any decisions about how to shore up lenders until seeing the results of the IMF analysis and similar tests by two international consultants due this month.

Spain Reeling

Deputy Prime Minister Soraya Saenz de Santamaria declined to comment when asked at a briefing yesterday whether Spain was seeking a rescue. Rajoy said on May 28 there would be no bailout for Spanish banks.

A bailout for Spain, reeling from a recession and the bursting of a property bubble, may dwarf previous rescues in the effort to stem the turmoil that began with Greece’s disclosure in 2009 that its finances were in worse shape than was previously known.

Since then, European governments and the IMF have made 386 billion euros in loan pledges to Greece, Ireland and Portugal. Spain’s economy is more than twice the size of the three countries combined. JPMorgan Chase & Co. (JPM) economist David Mackie said on May 30 that aid for the Spanish government and banks could total 350 billion euros.

Rubicon Crossed

“Spain is the Rubicon that should have never been crossed,” Nicholas Spiro, managing director of Spiro Sovereign Strategy said in a note to clients. “Not only would a limited bailout for Spain fail to restore confidence in the markets, it could fuel fears that more aid will be needed at a later stage and could also put Italy under more pressure.”

Spain has been toppled by its banking industry and one of the highest private debt levels in the euro region, even as its public debt remains below the European Union average. The country had budget surpluses in the three years through 2007, allowing it to go into the crisis with a debt burden equivalent to 36 percent of gross domestic product. That ratio was 69 percent last year.

The country has made at least four attempts to clean up its banks since the collapse of the real estate boom in 2008, tightening provisioning rules, encouraging mergers and coaxing lenders onto the stock market. The IMF said that “gradual approach” had allowed weak banks to undermine financial stability.

Rapidity Needed

Constancio told reporters in Lisbon that the request for help should be made “with some rapidity.” ECB council member Jens Weidmann urged Spain to request aid from the euro area’s rescue fund if the country can’t meet its financing needs, Die Welt am Sonntag reported, citing an interview.

The government shouldn’t hold out against seeking help, the Berlin-based newspaper quoted Weidmann as saying. Hoping for the ECB to jump in to avoid conditions attached to a rescue “is the wrong way.”

Still, Rajoy said he wouldn’t act until he has received the results of stress tests by Roland Berger and Oliver Wyman, due by June 21, and has made repeated calls for European institutions to help bring down the nation’s borrowing costs.

Spain Blinks

“The Spanish government was making noises to the effect that ECB was going to step in and Spain wasn’t going to blink,” said Ken Wattret, chief euro-region market economist at BNP Paribas SA in a telephone interview. “Well now Spain is going to blink.”

“The cost to the credibility of the sovereign has been pretty high,” he said.

Moody’s Investors Service said late yesterday the increasing prospect of Spain seeking aid, as well as growing estimates of the cost of helping banks, may prompt downgrades to its A3 rating.

If Greece leaves the single currency, “posing a threat to the euro’s continued existence,” the company would review all euro-area sovereign ratings, including those of the Aaa nations, Moody’s said.

The IMF report, which said the “core of the system appears resilient,” said the 37 billion euros of capital needs estimated for weaker lenders could rise due to unanticipated losses. The assessment incorporated Bankia group, which was nationalized on May 9, and put its needs at 13 billion euros to 14 billion euros, compared with the 19 billion euros the bank’s new management has demanded, the IMF official said.

Previous Bailout

Bankia group also went beyond the government’s provisioning rules when calculating the need for 19 billion euros of state support, which comes on top of 4.5 billion euros it received in a previous bailout. Economy Minister Luis de Guindos said two weeks earlier that 15 billion euros would be enough to fulfill the second of two decrees passed this year.

Even as the government said Bankia was a specific case, investors extrapolated the losses to the rest of the industry, undermining confidence and the government’s credibility. De Guindos told banks to take 84 billion euros in provisions and capital buffers, on top of 100 billion euros of provisions made since 2008.

Rajoy’s failure to restore confidence in its banks has prompted foreign investors to shun Spain’s bonds, making the Treasury increasingly dependent on Spanish lenders. Rajoy, who in November won the biggest majority that any Spanish party has clinched since 1982, is also losing support among voters as austerity measures fail to stem the crisis that has pushed unemployment to 24 percent. Governments in Greece, Ireland and Portugal were toppled after those three countries took bailouts.

To contact the reporters on this story: Emma Ross-Thomas in Madrid at; Charles Penty in Madrid at

To contact the editor responsible for this story: James Hertling at


Spain Seeks $125 Billion Bailout as Bank Crisis Worsens

By Emma Ross-Thomas, Charles Penty and Ben Sills - Jun 10, 2012 1:21 AM GMT+0700

Spain asked euro region governments for a bailout worth as much as 100 billion euros ($125 billion) to rescue its banking system as the country became the biggest euro economy so far to seek international aid.

“The Spanish government declares its intention of seeking European financing for the recapitalization of the Spanish banks that need it,” Spanish Economy Minister Luis de Guindos told reporters in Madrid today. A statement by euro region finance ministers said the loan amount will “cover estimated capital requirements with an additional safety margin.”

Spain's Economy Minister Luis de Guindos speaks at a news conference in Madrid today. Photographer: Angel Navarrete/Bloomberg

Spain's Economy Minister Luis de Guindos gestures during a news conference in Madrid today. Photographer: Angel Navarrete/Bloomberg

Mariano Rajoy, Spain's prime minister. Photographer: Jock Fistick/Bloomberg

Just seven months after winning a landslide victory, Prime Minister Mariano Rajoy was forced to abandon his bid to recapitalize Spanish banks without recourse to external help as a deepening recession forced lenders to recognize spiraling losses. Today’s move means Spain has a firewall in case the Greek election on June 17 unleashes a fresh round of market turmoil.

De Guindos said the terms of the rescue loan are “very favorable” compared with market rates and the funds will be channelled through Spain’s FROB bank fund. Banks getting aid will have to meet conditions, he said. The International Monetary Fund will only have an advisory role, he said.

The eurogroup statement said that the formal request will come “shortly.” An assessment will then be provided by the European Commission, which will liaise with the European Central Bank, the European Banking Authority and the IMF. There will also be a proposal for “the necessary policy conditionality” that will accompany the assistance.

Aid Pressure

European officials have failed to get their arms around a debt crisis that started in Greece at the end of 2009 and has now claimed the euro region’s fourth-largest economy. The bailout adds to the 386 billion euros ($480 billion) in pledges to Greece, Ireland and Portugal that European governments and the IMF have made since 2010.

Spanish officials faced increasing pressure to seek aid over the past week as European leaders race to put measures in place should next week’s Greek election increases the chances that the country will leave the euro. European Central Bank Governing Council member Ewald Nowotny said yesterday that any delay by in requesting aid would increase the costs of a rescue.

“The longer you wait with revamp measures, the more expensive it gets,” Nowotny said.

Funding Hole

Spanish borrowing costs have jumped since March and last week rose close to the euro-year high of 6.78 percent. The yield on the country’s 10-year bond has since slipped amid optimism that Rajoy would seek a bailout and was at 6.17 percent yesterday.

The Spanish government’s credibility was jolted by the funding hole reported last month by Bankia group, the third- biggest Spanish lender. The bank’s new managers went beyond the government’s provisioning rules and asked for a 19 billion-euro bailout. Economy Minister Luis de Guindos had said two weeks earlier that 15 billion euros would be enough to meet the requirements of the second of two banking decrees he has drafted this year.

Fitch Ratings downgraded Spain to BBB, within two steps of non-investment grade, on June 7 and said the cost to the state of shoring up banks may amount to as much as 100 billion euros in the worst case, compared with its previous estimate of 30 billion euros.

“The Spanish problem was entirely avoidable,” said Thomas Mayer, an economic adviser to Deutsche Bank AG in Frankfurt. “When Bankia got into trouble and they had to inject another 19 billion, the market thought, well, they don’t know what they are doing.”

To contact the reporter on this story: Ben Sills in Madrid at

To contact the editor responsible for this story: James Hertling at