Excerpt: "Spain became the fourth euro member to seek a bailout since the start of the region's debt crisis more than two years ago with a request for as much as 100 billion euros ($125 billion) in loans to rescue its banking system."



Spain's Prime Minister Mariano Rajoy speaks during a press conference in Madrid, 06/10/12. (photo: AP)

Spain Seeks Fourth EU Bailout With $125 Billion Aid Request

By Charles Penty, Emma Ross-Thomas, Ben Sills, Bloomberg News

pain became the fourth euro member to seek a bailout since the start of the region's debt crisis more than two years ago with a request for as much as 100 billion euros ($125 billion) in loans to rescue its banking system.

"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."

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. Concern about the banks, which are hobbled with more than 180 billion euros in problematic real estate loans and assets, drove Spanish borrowing costs to near euro-era records last month.

Economy Minister Luis De Guindos announced the aid request yesterday after a three-hour conference call with his European counterparts. He said the terms of the rescue loans are "very favorable" compared with market rates.

Debt Level

The funds will be channeled through Spain's FROB bank rescue fund, and will add to Spain's debt, which was 68.5 percent of gross domestic product last year. Should Spain request the maximum amount, it would add about 10 percentage points to that number, and interest paid on the loans will affect the deficit, which is the euro-area's third-largest at 8.9 percent of GDP.

Rajoy called a news conference for 12:00 in Madrid today. The European aid for Spain's banking industry will carry an interest rate of about 3 percent, El Pais reported today, citing people familiar with Spain's negotiations with its European partners whom the newspaper didn't identify by name.

Yesterday's move means Spain has a firewall in case the Greek election on June 17 unleashes a fresh round of market turmoil. The yield on Spain's benchmark 10-year yield bond jumped after the government announced the nationalization of Bankia Group last month, rising close to the euro-era high of 6.78 percent on May 30. The yield has since slipped amid optimism that Rajoy would seek a bailout and was at 6.17 percent on June 8.

European officials have failed to control 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.

Failed Attempts

Spain has made at least four attempts to overhaul its banks since the collapse of the real estate boom in 2008, tightening provisioning rules, encouraging mergers and coaxing lenders onto the stock market. The International Monetary Fund said that "gradual approach" had allowed weak banks to undermine financial stability.

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."

EU Pressure

De Guindos denied he had faced pressure from European officials to seek the rescue, 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 June 8 that any delay on Spain's part in requesting help for the banks would increase the costs of an aid plan.

The Spanish government wanted to "contribute as much as possible to restoring confidence in the single currency," and events in the coming days may spur market tension, De Guindos said yesterday at a press conference in Madrid.

Spain's bank rescue fund will only inject the EU funds into lenders that need it, and de Guindos said many banks won't require cash 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.

Financial Union

The International Monetary Fund, which will have an advisory role in the rescue after saying in a report June 8 that Spanish banks would need at least 37 billion euros to withstand a weakening economy, praised the agreement. U.S. Treasury Secretary Timothy F. Geithner said the loans and the support from its EU partners were "important for the health of Spain's economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area."

The loans 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 on June 8 that as the nation moved closer to needing external help "the increased risk to the country's creditors may prompt further rating actions."

Collateral Demands

Finland will also demand collateral for their share of the loans if the funds come from the temporary European Financial Stability Facility, Finance Minister Jutta Urpilainen told reporters yesterday. 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, giving Spain's EU lenders protection at the expense of bondholders.

"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.

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 make 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 yesterday 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."