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Rajoy Holds Bank Talks With EU as Fitch Downgrades Spain

Rajoy Holds Bank Talks With EU Leaders as Fitch Cuts Spain
Mariano Rajoy, Spain's prime minister. Photographer: Jock Fistick/Bloomberg

Spain is preparing to become the fourth euro-area nation to seek emergency assistance as the currency bloc’s finance chiefs plan weekend talks on potential aid to shore up the nation’s lenders.

European Central Bank Vice President Vitor Constancio said today that a Spanish request is “awaited” and will be “exclusively directed at the recapitalization of banks.” The bid may come as soon as tomorrow when finance ministers hold a conference call at about 1:30 p.m., according to a person familiar with the plans who declined to be identified because the matter is confidential.

The prospect of action underscores officials’ concerns that Greek elections on June 17 may unsettle investors 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 hours after Prime Minister Mariano Rajoy said for the first time that he is discussing with European leaders how to help Spanish banks.

“Finance ministers in the euro zone would like loose ends tied up before the situation in Greece goes live again,” Mujtaba Rahman, New York-based analyst for Eurasia group, said in a telephone interview. “This move is designed to be preemptive, to send a positive signal to market participants that the Spanish situation is being managed.”

Quick Decision

Constancio said a decision should be taken quickly and it’s up to the Spanish government to make a move.

“Not everything has to be concluded immediately, as long as there is an expression of a will for there to be a specific program for Spanish banks, which I hope will happen with some rapidity,” he told reporters in Lisbon.

That urgency contrasts with comments by Rajoy, who said yesterday he won’t act until he receives a report from the International Monetary Fund on June 11, and the results of bank stress tests from two international consultants by June 21.

Deputy Prime Minister Soraya Saenz de Santamaria declined to comment when asked at a briefing today whether Spain was seeking a rescue. She reiterated that the government will wait until getting the reports before making a decision.

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 previously known.

Loan Pledges

Since then, European governments and the IMF have made 386 billion euros ($480 billion) 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. economist David Mackie said on May 30 that aid for the Spanish government and banks could total 350 billion euros.

Spain’s 10-year bond yields rose to 6.24 percent today from 6.09 percent yesterday, more than double its 3 percent record low in 2005. The euro lost 0.7 percent to $1.2487 at 6:47 p.m. in Madrid.

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 in the worst case, compared with its previous estimate of 30 billion euros, as the country will remain in a recession next year.

Pressure Builds

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 he “of course considered it sensible to request aid, because the longer you wait with revamp measures, the more expensive it gets.”

Rajoy has said he wants to overcome German opposition to allowing the euro area’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.”

Credibility Jolted

The government’s credibility was jolted by the funding hole reported last month by the Bankia group, the third-biggest Spanish bank. The lender’s new managers went beyond the government’s provisioning rules in their cleanup of the lender and asked for a 19 billion-euro bailout. Economy Minister Luis de Guindos 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.

Standard & Poor’s said yesterday that 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.

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