Spain requests Bank Bailout after Audit reveals weak banks

[Agent Sorchus]

Jun 25, 6:25 PM EDT

Spain asks for bank rescue

CIARAN GILES
Associated Press

MADRID (AP) -- Spain has made a formal request for a loan to help clean up its troubled banking sector, the Economy Ministry said Monday.

However, the country has yet to specify how much of the (EURO)100 billion ($125.39 billion) loan package offered by the 17 countries that use the euro it will ask for. Economy Minister Luis De Guindos said recently the figure will be made known July 9 when Spain and its single currency partners reach agreement on the terms of the loan, such as the interest rate.

Last week, two international audits commissioned by the government said that Spain's banks could need up to (EURO)62 billion ($77.7 billion) to survive if the economy were to suffer an extreme deterioration.

Spain earlier this month finally acknowledged that some of its banks were in severe trouble owing to the build-up of toxic assets following the collapse of the country's bloated real estate market after 2008.

The letter to the euro-area governments requesting the loan said the amount sought "would be sufficient to cover capital necessities as well as an additional margin of security up to a maximum of (EURO)100 billion."

It was sent to Jean-Claude Juncker, the Luxembourg Prime Minister who is also president of the eurogroup of finance ministers.

Amadeu Altafaj Tardio, spokesman for the European Commission, the European Union's executive body, said experts from the Troika - the European Commission, European Central Bank and IMF - as well as the European Banking Authority would "flying in (to Madrid) as soon as possible."

In a statement, the commission's top financial and monetary affairs officer, Olli Rehn, welcomed the request and pledged "to step up work to get a clean assessment of the sector and its needs." He said the two audits were "a good starting point."

Rehn said he was "confident an accord can be reached in a matter of weeks."

Tardio told reporters there would be both conditions for both the bailed-out banks as well as for the whole Spanish banking industry.

The government ordered the audits, carried out by Oliver Wyman Inc. and Roland Berger Strategy Consultants GmbH, as an act of transparency in the hope their results would calm markets. Some analysts said the Spanish economy's outlook is so bad that the assumptions may be conservative.

Four other international auditing firms will now carry out more exhaustive audits of each bank by July 31. Based on these, a round of stress tests will then be held on each entity in September. Banks then seen to be financially unsound will be given 15 days to come up with restructuring plans and, if approved, nine months to fulfill them.

Underscoring market concerns about Spain's finances, Moody's Investor Service late Monday downgraded its credit ratings on 28 Spanish banks. Moody's said the weakening condition of the country's finances is making it more difficult for the government to support the country's lenders. The rating agency also said the banks are vulnerable to losses from Spain's busted real estate bubble.

Spain is pushing for the loans to go directly to the banks, rather than have the government be responsible for repayment. While organizations such as the International Monetary Fund support this procedure, others such as fellow eurozone country Germany have ruled it out. Berlin insists on abiding by current regulations under which the money must be given to a government, adding to its debt pile. The Commission also stands by this position.

But Spanish Foreign Minister Jose Manuel Garcia-Margallo said Monday "the question of whether the money will go directly to the banks or to the state is still open,"

In the letter, de Guindos said the aid would be channeled through Spain's state-run bank bailout fund, known as the FROB.

Garcia-Margallo said Spain would seek the longest period possible for repayment and the lowest interest rate. De Guindos last week estimated the rate could be around 3 to 4 percent.

Investors worry the government may not get the money back from the banks and would have to repay the loans itself and that this could push it closer to joining Greece, Ireland and Portugal in seeking a rescue loan for the whole country.

Spain is the eurozone's fourth-largest economy and such a sovereign bailout would seriously challenge the bloc's finances. The country is struggling through a recession with a swollen deficit it must slash and a 24.4 percent jobless rate.

Those concerns drove Spain's benchmark 10-year borrowing rate up 0.12 percentage points to 6.48 percent Monday.
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Toby Sterling contributed to this report from Amsterdam

So Berlin is seeking to continue 'forcing' other nations to increase national debt instead of allowing the banks to take the debit and fold or fail on their own.

Now of course I am no an Economist (thank the flying spaghetti monster for that) so I have no clue if there is some theoretical reason for the politicians in Berlin to be resistant to spain moving to put the debt directly on the banks. Any clues?

[Sea Skimmer]

Around a quarter of all Spanish debts are owed to the Germans, the Germans want the Spanish government on the hook for any loans so they have a higher chance of being repaid. That's the reason for it, making sure even the banks collapsing anyway won't let the Spanish escape paying unless the government exits the Eurozone. Course, that's largely a scare tactic anyway, Greece might be able to leave the Eurozone without collapsing it, Spain would be death of the system and Germany isn't going to let that happen. Now its a game of brinkmanship.

[DarkArk]

It's really telling that the Europeans are responding to the crisis as separate countries rather than a unified system. It seems to me that it's just a matter of time before the whole system comes down, because no one seems to really believe in it.

Spain would be death of the system and Germany isn't going to let that happen.

What if they have no choice? It seems to me that Germany's options keep shrinking by the day. It doesn't seem the Germans have an actual plan to end the problem, just keep applying band aids.

[someone_else]

It's really telling that the Europeans are responding to the crisis as separate countries rather than a unified system.

On most important matters (like say waging wars to FREEDOMIZE Lybia or other FREEDOMIZATIONS of the past) the EU was dormant and every state decided on its own.

The EU is a more a trade alliance than a political figure. That's why it's a pain in the ass to solve everything, none has the lever of authority over another EU state like for example the US government has.

It seems to me that it's just a matter of time before the whole system comes down, because no one seems to really believe in it.

I have to second this opinion. Unless someone gives the EU some amount of authority over what the hell each EU nation is doing, you have whoever is more dominant at the moment (usually Germany or France) that tries to have the others that are worth something do what they want, with mixed results.

[Spoonist]

???
I hope neither of you claim to have studied up on the EU and EURO.

EU != EUROzone

On most important matters (like say waging wars to FREEDOMIZE Lybia or other FREEDOMIZATIONS of the past) the EU was dormant and every state decided on its own.

Yes, of course. Who would argue for anything else? Why should the EU have anything to do with military decisions of member states? It is not a military alliance.

Unless someone gives the EU some amount of authority over what the hell each EU nation is doing, you have whoever is more dominant at the moment (usually Germany or France) that tries to have the others that are worth something do what they want, with mixed results.

http://en.wikipedia.org/wiki/European_Union#Governance

The EU is a more a trade alliance than a political figure.

No it isn't. Maybe you could do such claims with the steel and coal pactbut it would still be flawed.

...none has the lever of authority over another EU state like for example the US government has.

Nor should they. What you are proposing would not go down positively in any of the member states. Only a complete ignorance of european politics would result in thinking that such a thing would work or even be a good idea in theory.

It seems to me that it's just a matter of time before the whole system comes down, because no one seems to really believe in it.

I have to second this opinion.

Again, EU != EURO, and no the whole system won't come down. There are a couple of strong and robust economies both in the EU as well as the smaller subset of the EURO, so come down is not an option.
And yes a whole lot of people believe in it, that is why they are scurrying around trying to fix things.

[LaCroix]

Again, EU != EURO, and no the whole system won't come down. There are a couple of strong and robust economies both in the EU as well as the smaller subset of the EURO, so come down is not an option.
And yes a whole lot of people believe in it, that is why they are scurrying around trying to fix things.

It's funny how people always directly go from - "monetary union not working, yet" to "biggest economy on this planet will fail and fall apart".

Even in the extremely unlikely case that the EURO would fail utterly, the countries in question would more or less grit their teeth, revert to their old currencies and try again in a decade or two, after they did some reforms.

[K. A. Pital]

If Euro fails as a common currency, the EU will survive, but at no point it will "try again" in a few decades.