Euro Zone Leaders Agree to Lend Spain Up to $125 Billion

By: Reuters

Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125 billion) to shore up its teetering banks and Madrid said it would specify precisely how much it needs once independent audits report in just over a week.

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After a 2 1/2 hour conference call of the 17 European finance ministers, which several sources described as heated, the Eurogroup and Madrid said the amount of the bailout would be sufficiently large to banish any doubts.

"The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to 100 billion euros in total," a Eurogroup statement said.

Spain said it wanted aid for its banks, but would not specify the precise amount until two independent consultancies — Oliver Wyman and Roland Berger — deliver their assessment of the banking sector's capital needs some time before June 21.

"The Spanish government declares its intention to request European financing for the recapitalization of the Spanish banks that need it," Economy Minister Luis de Guindos told a news conference in Madrid.

He said the amounts needed would be manageable, and that the funds requested would amply cover any needs.

A bailout for Spain's banks, beset by bad debts since a property bubble burst, would make it the fourth country to seek assistance since Europe's debt crisis began. With the rescue of Greece, Ireland, Portugal and now Spain , the European Union and International Monetary Fund have now committed around 500 billion euros to finance European bailouts.

The Group of Seven developed nations welcomed the plan, saying it marked an important step toward more fiscal integration in the region.

"G7 ministers welcome Spain's plan to recapitalize its banking system and the Eurogroup's announcement of support for Spain's financial restructuring authority," the G7 said in a statement released by the U.S. Treasury.

"These steps represent important progress as the euro area moves forward on greater financial and fiscal union to reinforce monetary union," the statement said. The G7 comprises the United States, Canada, Britain, Italy, France, Germany and Japan.The head of the IMF said the global lender stood ready to help monitor the assistance the euro zone intends to provide to Spain's banks, and said the size of the planned aid appeared ample.

"The IMF stands ready, at the invitation of the Eurogroup members, to support the implementation and monitoring of this financial assistance through regular reporting," IMF Managing Director Christine Lagarde said in a statement.

She said the euro zone's plan to provide up to 100 billion euros was consistent with the IMF's estimate of the capital needs of Spain's banks and should provide "assurance that the financing needs of Spain's banking system will be fully met."

U.S. Treasury Secretary Timothy Geithner welcomed the euro zone's action, calling it an important step toward financial union.

"We welcome Spain's action to recapitalize its banking system and the commitment by its European partners to provide support," Geithner said in a statement. "These are 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."

Heated Debate

Officials said there had been a heated debate over the IMF's role in Spain's bank rescue, which Madrid wanted kept to a minimum. It will not provide any of the money.

In the end it was agreed that the IMF would help monitor reforms in Spain's banking sector, while EU institutions would ensure Spain stuck to its broader economic commitments.

"We invite the IMF to support the implementation and monitoring of the financial assistance with regular reporting," the Eurogroup statement said.

Sources involved in the talks said there had also been pressure applied on Madrid to make a precise request right away, but Spain had resisted.

Euro zone policymakers are eager to shore up Spain's position before June 17 elections in Greece which could push Athens closer to a euro zone exit and unleash a wave of contagion. Spain's auditors could report back after that date.

Nonetheless, analysts said financial markets may be calmed by the announcement when they reopen on Monday.

"The figure of up to 100 billion is more encouraging and pretty realistic; it's an attempt to cap the problem," said Edmund Shing, European head of equity strategy at Barclays. "The issue, however, is there is still a lack of detail about where the money's coming from, which is crucial. The market will treat it with some caution until they see how it will be funded."

The Eurogroup said the funds could come from either from the euro zone's temporary rescue fund, the European Financial Stability Facility (EFSF) , or the permanent mechanism, the European Stability Mechanism, which is due to start next month. Finland said that if money came from the EFSF, it would want collateral.

EU sources said there was a preference to channel money to Spain through the ESM, rather than the EFSF. Under the ESM, an approval rate of 90 percent or less is needed to trigger aid, and the fund also has more flexibility in how it operates.

"That's why it's so important that the ESM ... be ratified quickly," German Finance Minister Wolfgang Schaeuble said.

The Spanish government has already spent 15 billion euros bailing out small regional savings banks that lent recklessly to property developers.

Spain's biggest failed bank, Bankia, will cost 23.5 billion euros to rescue and its shareholders have been wiped out.

"Whatever the formula being used, we need to say two things: first the innocent should not suffer for the guilty, second public money should come back to public coffers," said Socialist opposition chief Alfredo Perez Rubalcaba after speaking with Prime Minister Mariano Rajoy on Saturday morning.

EU Rescue Funds

The race to resolve the banks' troubles comes after Fitch Ratings cut Madrid's sovereign credit rating by three notches to triple-B, highlighting the Spanish banking sector's exposure to bad property loans and to contagion from Greece's debt crisis.

It 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 billion to 100 billion euros ($75 billion to $125 billion). The higher figure would be in a stress scenario equivalent to Ireland's bank crash.

Italy could yet get dragged in too. Its industry minister, Corrado Passera, said the economic situation in Italy had improved since the end of 2011, but remained critical.

"Europe was more disappointing than we had expected, it was less capable of tackling a relatively minor problem such as Greece," Passera told a conference.

If a request is made, Spain is expected to ask for help from the 440 billion euros EFSF.

The process is likely to involve bonds from the EFSF being injected into Spanish banks with no new capital raised, a euro zone official said on Friday. The bonds can then be used as collateral, allowing the banks to access European Central Bank liquidity.

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.

Conditions in the plan would be related to the banks and would probably not add to the austerity measures and structural economic reforms which Rajoy's government has already put in place, EU and German sources said.

A "bailout lite" would help salve Spanish pride. Spain is the world's 12th largest economy and No. 4 in the euro zone. EU and German officials have cited national pride as a barrier to requesting a full assistance program.

The European Commission and Germany both agreed in principle last week that Spain should be given an extra year to bring its budget deficit down below the EU limit of 3 percent of gross domestic product because of a deep recession.