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,” 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.”
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 channeled through Spain’s FROB bank rescue fund, whose liabilities count as public debt. The maximum amount of the loans is equivalent to about 10 percent of gross domestic product and interest paid on the loans will affect the deficit, which is the euro-area’s third-largest.
Subject to Conditions
The FROB will only inject capital into lenders that need it, and de Guindos said many banks won’t as difficulties are concentrated in about 30 percent of the industry. Lenders receiving aid will be subject to conditions, de Guindos said, without giving details. The government won’t be forced to take additional measures on the budget or economy.
“The 100 billion euros is the number that we were looking for so I’m cautiously optimistic,” Olly Burrows, credit analyst at Rabobank International, said in a telephone interview from London. “We still have to find a solution to the sovereign debt crisis: it’s not done yet and we still have to press on with the task of uniting Europe.”
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 International Monetary Fund have made since 2010.
De Guindos denied he had faced pressure from European officials to seek aid, a week before elections in Greece that risk prompting the country’s exit from the euro. European Central Bank Governing Council member Ewald Nowotny said yesterday that any delay on Spain’s part in requesting aid would increase the costs of a rescue. Spain’s banks are hobbled with more than 180 billion euros of bad real estate loans and assets stemming from the collapse of a property boom that was the country’s main driver of economic growth.
Guindos said the government wanted to “contribute as much as possible to restoring confidence in the single currency,” and said events in the coming days may spur market tension.
The International Monetary Fund, which will have an advisory role after saying in a report yesterday that Spanish banks would need at least 37 billion euros to stand a weakening economy, praised the agreement. U.S. Treasury Secretary Timothy F. Geithner also welcomed the deal.
The loan will ease pressure on the Treasury, de Guindos said. The debt agency has reduced its issuance at debt auctions this year as foreign investors cut holdings of Spanish debt. That has increased Spain’s dependence on domestic banks, which in turn depend on the ECB for funding.
Still, the agreement, which de Guindos refused to call a rescue, may spur further downgrades in the nation’s credit rating. Moody’s Investors Service, which grades Spain at A3, said late yesterday that as the nation moved closer to needing external help “ the increased risk to the country’s creditors may prompt further rating actions.”
“Market reaction is unlikely to be favorable given that the bailout places even more strain on Spain’s creditworthiness, sets a precedent that the euro zone’s other bailed-out countries, in particular Ireland, are likely to object to, and risks putting pressure on Italy,” Nicholas Spiro, managing director at Spiro Sovereign Strategy, said in a note.
Finland will demand collateral for the loans if they come from the temporary European Financial Stability Facility, Finance Minister Jutta Urpilainen told reporters. Ministers haven’t decided whether that fund or its permanent successor, the European Stability Mechanism, will be used, Urpilainen and de Guindos said. Should the ESM provide the funds, the loans would be senior to outstanding government debt, given Spain’s EU lenders protection at the expense of bondholders.
Prime Minister Mariano Rajoy, who said as recently as May 28 there would be no bailout for the nation’s lenders, will travel to Poland tomorrow for the European soccer championship and a meeting with his Polish counterpart. He said on June 7 he wouldn’t take any decision on the nation’s banks until after receiving results of an audit of the banks by international consultants Roland Berger and Oliver Wyman.
De Guindos said today the government will decide how much of the total it will use after receiving those reports in the next few days. They will probably show capital needs are “manageable,” and the 100 billion euro figure is a “maximum.”
The formal request for aid will come “shortly,” the statement from the eurogroup of ministers said. 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 be a proposal for “the necessary policy conditionality for the financial sector.”
Concern about the health of Spanish banks, led to a jump in the country’s borrowing costs since March and last week the 10-year yield rose close to the euro-year high of 6.78 percent. The yield 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. 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.
“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.”