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Five senior EU and German officials said deputy finance ministers from the single currency area would hold a conference call on Saturday morning to discuss a Spanish request for aid, although no figure for the assistance has yet been fixed. Later the Eurogroup, which consists of the euro zone’s 17 finance ministers, will hold a separate call to discuss approving the request, the sources said. “The announcement is expected for Saturday afternoon,” one of the EU officials said. The dramatic development comes after Fitch Ratings cut Madrid’s sovereign credit rating by three notches to BBB on Thursday, highlighting the Spanish banking sector’s exposure to bad property loans and to contagion from Greece’s debt crisis.
“The government of Spain has realized the seriousness of their problem,” a senior German official said. He added that an agreement needed to be reached before a Greek election on June 17 which could cause market panic and increase the threat of Athens leaving the euro zone if left-wing parties opposed to Greece’s EU/IMF bailout win. The EU and German sources spoke to Reuters on condition of anonymity due to the sensitivity of the matter. Spain’s deputy prime minister, Soraya Saenz de Santamaria, said the government needed to have at least a preliminary estimate of how much extra capital the banks needed before taking a decision. The International Monetary Fund is expected to announce imminently the results of its own audit.
“It’s important to respect the proceedings because it’s important to know the ground,” she told reporters, while not denying that the Eurogroup would hold a call on Spain’s needs. “Before taking any kind of decision one should at least have a first estimate of the ground and the ground means figures.”
The European Commission’s spokesman on economic affairs said Spain had made no request for aid but the euro zone stood ready to help if necessary. “If such a request were to be made, the instruments are there, ready to be used, in agreement with the guidelines agreed in the past,” Amadeu Altafaj said. “We are not at that point.”
EFSF FUNDS
If a request is made, Spain is expected to ask for help from the euro zone’s 440 billion euro bailout mechanism, known as the European Financial Stability Facility. The amount will depend on the IMF audit and a separate report due by June 21 from two independent assessors, Oliver Wyman and Roland Berger. Financial industry sources told Reuters on Thursday that the IMF report, to be made public on Monday, had estimated Spanish banks’ minimum capital needs at 40 billion euros ($50 billion), rising to 90 billion euros for a fuller recapitalization.
Officials in Spain said the parameters for the IMF and the private-sector audits were effectively the same, meaning Spain could make the request for aid on the basis of the IMF figures rather than having to wait for the other assessment.
The euro zone has been under strong pressure from the United States, China, Canada and other major partners to take swift, decisive action to prevent the debt crisis spreading and causing greater damage to the world economy.
U.S. President Barack Obama said European leaders appeared to be moving in the right direction, but he also emphasized that he was being careful not to tell Europe what to do. “They understand the seriousness of the situation and the urgent need to act,” Obama told a news conference. Speaking in Berlin, German Chancellor Angela Merkel said she was not pressing any country to take a bailout, saying it was up to Spain to decide what it wanted to do: “It’s down to the individual countries to turn to us,” she said. “That has not happened so far, and therefore (we) will not exert any pressure.” Fitch said the cost to the Spanish state of recapitalizing banks stricken by the bursting of a real estate bubble, recession and mass unemployment could be between 60-100 billion euros ($75-$125 billion) – or 6 to 9 percent of Spain’s gross domestic product. The higher figure would be in a stress scenario equivalent to Ireland’s bank crash.
BAILOUT LITE?
European shares and the euro fell amid mounting concern over Spain following the Fitch downgrade although the Spanish stock market climbed nearly two percent on the prospect of help for the banks. While Spain would join Greece, Ireland and Portugal in receiving a European financial rescue, officials said the aid would be focused only on its banking sector, without taking the Spanish state out of credit markets.
That would be crucial to avoid overstraining the euro zone’s rescue funds, which would struggle to cover Spanish government borrowing needs for the next three years plus possible additional assistance for Portugal and Ireland.