Spain Expects to Tap About $75 Billion in Rescue Financing for Its Banks

Spain expects to use about 60 billion euros, or $75 billion, of the 100 billion euros of bank rescue financing offered by European finance ministers in June, according to the Spanish economy minister, Luis de Guindos.

Spain, Euro coin
Philippe Huguen | AFP | Getty Images
Spain, Euro coin

Mr. de Guindos also said Madrid could make stronger fiscal commitments if the European Central Bank (ECB) eased Spain’s borrowing costs by buying its government bonds.

Next month could prove decisive for Spain and other ailing economies at the heart of the euro debt crisis. A proposal for an ambitious bond-buying program will be on the agenda of the central bank’s governing council meeting on September 6.

In the past, the central bank has bought government debt in the secondary markets to lower interest rates for countries including Spain and Italy. There is speculation that a new program would go beyond that, with the central bank setting limits on the difference in interest rates, called the spread, between German debt and the bonds of ailing countries in the euro zone.

Though Mario Draghi, the European Central Bankpresident, pledged a month ago that the central bank would “do whatever it takes to preserve the euro as a stable currency,” bank policy makers are deeply divided over the extent to which it should involve itself in the bond market.

During an interview last week in his office, Mr. de Guindos expressed confidence that the central bank would come to the rescue. The European Central Bank’s “action is going to reassure markets and is going to be an important helping hand,” he said, adding, “The Spanish government accepts that the intervention of the ECB in the secondary markets should not relax the fiscal consolidation effort, and we have to give reassurance to the E.C.B. that we are going to meet our commitments.”

Credit rating agencies and many economists expect Spain to request a broader rescue package than the aid that has been offered for its ailing banking sector. Analysts expect Madrid to ask that a bailout fund — either the European Financial Stability Facility or the European Stability Mechanism, which is expected to go into operation shortly — be used to purchase Spanish government debt on more favorable terms than what the country offers investors at bond auctions.

Mariano Rajoy, the Spanish prime minister, said this month that Spain would decide whether to ask for a rescue once it knew the conditions.

Whether Spain will request further aid, Mr. de Guindos said during the interview, “is something that is totally open.”

Spain Downgraded?

Last week, two credit rating agencies, Standard & Poor’s and Fitch, said their ratings for Spain would not be affected if Madrid made such a request.

“Such external support could provide Spain with the breathing space to implement its ambitious fiscal and economic reforms,” Fitch wrote in a note on Friday.

Madrid has deferred a decision on how much of the 100 billion euros of bank financing it needs, and has hired independent consulting and accounting firms to analyze the situation. These firms have studied the books of Spanish banks to assess the damage caused by a decade of reckless real estate lending.

The final assessment will be made in mid-September by Oliver Wyman, a consulting firm. In June, Oliver Wyman published a preliminary estimate that Spanish banks needed as much as 62 billion euros in extra capital. Asked what he expected the final report to show, Mr. de Guindos said, “I don’t think it is going to be very different.”

Mr. de Guindos also said that if discrepancies emerged between Oliver Wyman’s assessment and what banks asked to receive, the firm “is the one who has the upper hand, without a doubt.”

Spain’s banking crisis came to a head in May when Bankia, a mortgage lender, was nationalized. Bankia’s new board asked for 19 billion euros on top of the 4.5 billion euros it had already received from Spain’s government.

Spain’s recession has showed signs of deepening, with unemployment climbing to almost 25 percent and consumption falling. The International Monetary Fund recently revised its economic forecast for Spain, predicting a 0.6 percent contraction in gross domestic product in 2013, rather than the growth of 0.1 percent it had previously expected.

Mr. de Guindos said a longer recession would not prevent Spain from meeting its fiscal targets. He said revenue from personal income taxes was so far “in line with our projections.” He also expressed optimism about Spain’s real estate market.

“In the case of property prices, I think the drop is over in certain segments of the market,” he said. “In some metropolitan areas, we are even beginning to see scarcity of supply.”

Mr. de Guindos also insisted that as much as three percentage points of the premium that investors were demanding for buying Spanish rather than German debt reflected concerns about the euro’s collapse, not Spain’s own shortcomings. Erasing 2 percent of that premium would cut the cost of servicing Spain’s debt until the end of 2013 by 12 billion euros, he said.

Spain’s risk premium reached 6.49 percent in July, amid expectations that the country would be pushed into a Greek-style bailout that Europe could not afford. The premium has fallen back over the last month after Mr. Draghi pledged that the European Central Bank would act, and it closed to 5.08 percentage points on Friday. Mr. de Guindos, however, dismissed the idea that Spain came close to a financing collapse last month.

“We have always been able to tap the markets — of course with high interest rates — but the markets have not been totally closed up,” he said.

The Spanish government is set on Friday to approve the framework for banks to access rescue financing while allowing them to transfer troubled assets to a “bad bank.” In return, however, Spanish regulators will receive broader powers to restructure and dismantle ailing banks.

Mr. de Guindos dismissed the idea that a Spanish bank might end up being closed down.

“The term liquidation implies that you are closing the shop, but that is not the case,” he said.