View: As Downgrade Looms, Spain Expected to Ask for Aid - Businessweek

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.

European Central Bank Vice President Vitor Constancio said yesterday that a Spanish request for a bank bailout is “awaited.” That bid may come as soon as today when finance ministers hold a conference call, said a German official and a European Union aide, who declined to be identified because the matter is confidential. Finance ministers will speak at 4 p.m. Madrid time, two European officials said. They plan to issue a statement afterwards, another official said.

In time for the call, 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 is 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.

Deputy Prime Minister Soraya Saenz de Santamaria declined to comment when asked at a briefing yesterday whether Spain was seeking a rescue.

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) (JPM) economist David Mackie said on May 30 that aid for the Spanish government and banks could total 350 billion euros.

“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.”

Dutch Finance Minister Jan Kees de Jager said yesterday he doesn’t rule out the possibility that European finance ministers would discuss Spain today. The situation is “urgent,” he said in the Hague.

Constancio told reporters in Lisbon that the request should be made “with some rapidity,” and the ECB executive board member said the longer it is delayed, the higher the cost might be. Still, Rajoy said he won’t act until he has received the results of stress tests by Roland Berger and Oliver Wyman, due by June 21.

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.”

“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 of the nation’s 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, it said.

“As Spain moves closer to the need for direct external support from its European partners, the increased risk to the country’s creditors may prompt further rating actions,” Moody’s said in a statement.

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.

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 banking decrees he has drafted 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 has told banks to take 84 billion euros in additional provisions and capital buffers in two decrees aimed at lending to the real-estate industry.

Spain is struggling to restore confidence in its banks as foreign investors shun its bonds, making the Treasury increasingly dependent on Spanish lenders. Adding to pressure, the nation’s credit rating was cut by Fitch Ratings to within two steps of junk on June 7.

Rajoy, who in November won the biggest majority that any Spanish party has clinched since 1982, is seeing his support slip as austerity measures and steps to bolster lenders fail to stem the crisis that has pushed the unemployment rate to 24 percent. Governments in Greece, Ireland and Portugal were toppled after those three countries took bailouts.

“This won’t be good news for Rajoy,” Jose Ignacio Torreblanca, head of the Madrid office of the European Council on Foreign Relations, said in a telephone interview. “There are questions on whether the government’s handling of Bankia has been deft enough.”

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Charles Penty in Madrid at cpenty@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net