Spain seeks financial aid

Spanish banks may need up to €62 bn in extra capital, after its medium-term borrowing costs spiralled.

Spanish Prime Minister Mariano Rajoy. Picture: Vanessa Carvalho/Brazil Photo Press/AFP

LUXEMBOURG/MADRID - Independent auditors said Spanish banks may need up to €62 billion in extra capital, to be filled mostly by a euro zone bailout, after Spain's medium-term borrowing costs spiralled to a euro-era record on Thursday.

Euro zone finance ministers met in Luxembourg to discuss how to channel up to €100 billion in aid to Spanish lenders weighed down by bad debts from a burst property bubble. Madrid's economy minister said a formal request would be made in days for the bailout, which was agreed two weeks ago.

Many in the markets see the package as a mere prelude to a full programme for the Spanish state, which Madrid vehemently denies it will need.

Spain's financial plight took centre stage a week before a European Union (EU) summit tackles long-term plans for closer fiscal and banking union in a bid to strengthen the euro's foundations, after bailouts for Greece, Ireland and Portugal failed to end a 2-1/2-year old debt crisis.

To pave the way, the leaders of Germany, Italy, France and Spain will meet in Rome on Friday.

"We are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area," International Monetary Fund chief Christine Lagarde, who attended the Luxembourg meeting, told reporters.

"With that in mind, the IMF believes that a determined and forceful move towards complete European monetary union should be reaffirmed."

The Bank of Spain said the €100 billion offered to Madrid two weeks ago would give a wide margin of error. Spain's three biggest banks would not need extra capital even in a stressed scenario, it said. The government said it did not expect to shut any banks and would restructure those in trouble.

In Luxembourg, the finance ministers decided Spain should initially apply to the euro zone's temporary rescue fund, the European Financial Stability Facility, with the loan taken over by the permanent bailout fund the European Stability Mechanism (ESM) once it is up and running after 9 July.

"The financial assistance will be provided by the EFSF until the ESM becomes available, and then it will be transferred to the ESM," Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, told a news conference.

"We would expect the Spanish authorities to put forward a formal request for financial assistance by next Monday," he said.

Such a solution should avert a problem which had scared investors: debt issued by the ESM must be paid back first in case of a Spanish default, relegating private creditors lower in the pecking order.

Italian Prime Minister Mario Monti suggested, on the sidelines of this week's G20 summit, using the euro zone's rescue funds to buy the bonds of Spain and Italy in the secondary market to bring down their borrowing costs.

Monti hosts Spanish premier Mariano Rajoy, Germany's Merkel and French President Francois Hollande in Rome on Friday and is also expected to raise the idea there. Merkel has played down the proposal, which investors said might be counter-productive unless the ECB stepped in decisively in support.

Any European bond-buying would come with strings attached, equivalent to the sort of bailout programmes that Rome and Madrid are trying to avoid because of the stigma attached.

Given the limited capacity of the temporary EFSF and planned permanent ESM rescue funds, with at most €500 billion available, a senior EU source said such intervention would make sense only if the ESM had a banking licence enabling it to borrow from the ECB. Germany has so far opposed that idea.