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Spain Seeks $125 Billion Bailout as Bank Crisis Worsens

Spain's Prime Minister Mariano Rajoy
Spain's Prime Minister Mariano Rajoy. Photographer: Angel Navarrete/Bloomberg

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.”

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.”

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