Spain asks for bank rescue

By DANIEL WOOLLS,Associated Press HAROLD HECKLE,Associated Press Updated at 2012-06-26 05:44:12 +0000


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 €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 €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 €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.


Toby Sterling contributed to this report from Amsterdam.


Spain's banks, government co-dependent on debt

MADRID (AP) — The Spanish government and Spanish banks are perilously co-dependent.

The financial strength of one hinges on the other, and right now both are struggling for survival.

The Spanish economy, the fourth-largest among the 17 countries that use the euro, is suffering from the aftershocks of a real estate bust that has devastated banks and families. Unemployment is nearly 25 percent and the economy is forecast to shrink 1.7 percent in 2012.

At the request of the Spanish government, euro countries offered up to €100 billion ($125 billion) in rescue loans for Spanish banks on June 9.

Spain made the formal petition for the aid on Monday, but the terms of the loans — including the size and interest rates — have yet to be agreed. They are expected to be made public by July 9 and will likely be discussed at a European Union leaders' summit that starts Thursday in Brussels.

The bank bailout, however, has only made investors more nervous about Spain's financial condition.

Although Spanish banks will agree to pay back the loans with interest, it is the Spanish government that is on the hook if they cannot. In effect, the bank loans will be treated as government debt. And as the country's debt load rises, so does the interest rate it pays to borrow money, a sign that the pool of investors hungry for Spanish bonds is shrinking.

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.

One group of investors that isn't shying away from Spanish government bonds is Spain's banks. The amount of Spanish government debt owned by Spanish banks — yes, the same banks that are about to receive billions in emergency loans — is rising fast.

"It is as if the government were buying its own debt," says Alejandro Varela of Renta4, a Madrid-based brokerage. "It is like a dog chasing its own tail."

With Spain's economy enduring its second recession in just three years, analysts say the odds are rising that the government will need a bailout of its own. The yield on the country's 10-year bonds surpassed 7 percent last week, the level that pushed Ireland, Portugal and Greece to the breaking point. On Monday, the yield was 6.57 percent.

Here are some questions and answers about the tight relationship between the Spanish government and its troubled banks:


Two-thirds of Spain's government bonds are owned by the country's banks, pension funds and insurance companies. That's up from 50 percent at the end of last year. By comparison, only 38 percent of French government bonds are held by domestic banks and other financial firms.

In Spain the sharp increase in such a short period signals that foreign demand is falling fast as the country's economic outlook worsens.

Spain has issued €50 billion in bonds since the start of the year. It plans to issue another €36 billion by the end of 2012, bringing its total debt to €608 billion. The economy ministry notes that demand has been strong at recent bond auctions. However, the Treasury has been careful to issue debt in small increments — about €2 billion at each auction. And it knows the takers will include those trusty Spanish banks.


They are attracted to the high interest rate on Spanish government bonds. The interest rate, or yield, on 10-year Spanish bonds has of late been the highest it has been since the country joined the euro in 1999. It means financial markets consider Spanish bonds to be a risky investment.

The European Central Bank is making Spanish bonds even more attractive for banks. To help ease the continent's financial crisis, the ECB has provided European banks €1 trillion in three-year loans carrying an interest rate of 1 percent. Spanish banks, which have borrowed tens of billions of euros under the ECB program, can make a tidy profit simply by pocketing the spread between the interest rates on ECB loans and Spanish bonds.

Analysts say there is another reason Spanish banks keep buying their government's debt: survival. If Spanish banks were to stop buying Spain's bonds at a time when foreign money is fleeing, the government's borrowing costs would rise even higher and so would the threat of default — on the very bonds held by the banks.

"If something does go wrong, it is Spanish banks that will be hardest hit by that," says Jennifer McKeown of Capital Economics in London.


The eurozone's $125 billion package of rescue loans for Spain's troubled banks is supposed to help them deal with huge losses on real estate investments and promote economic growth by making it easier for them to lend money to companies and individuals.

But the rescue package hasn't eased jitters about the country's financial system — it's worsened them.

Bond investors have reacted to the deal by driving the (country's) government's borrowing rates higher. That increases the likelihood that the government itself will need help from the rest of Europe to get out from under its rising debt burden.

Spain's debt as a proportion of its annual economic output was forecast to be 80 percent this year before the bank bailout existed. With the bank bailout included, the country's debt-to-GDP ratio rises to 90 percent or more, according to some private analysts. When a country's debt burden exceeds 90 percent, it's generally considered bad for an economy's health.

Spain's total debt includes bonds issued by the central, regional and local governments, plus other liabilities, such as unpaid bills to state suppliers.

Spanish banks have also been hurt by the bailout. As the interest rate on government bonds rises, the value of the bonds already owned by banks falls.


Banco Santander, the largest bank by market capitalization in the euro region, holds about €35 billion in Spanish debt, or about 3 percent of its total assets. It is considered a relatively healthy bank that will not need to tap the $125 billion emergency loan package.

Bankia, SA, which crumbled under the weight of bad real estate loans and was recently nationalized, holds almost €17 billion in state debt, or 5.5 percent of its total assets. It is one of several big banks that will need billions in rescue loans. CatalunyaCaixa, another bank that needs rescue loans, owns €3.9 billion in Spanish bonds, or 5 percent of its total assets.


The tight link between the Spanish government and its banks is sustainable, but just barely, says Varela of Renta4. The interest rates on Spanish government bonds are high but manageable — for a short while longer, he says.

Spain's bond yields were even higher before it joined the euro, but back then the economy was growing and tax revenue was increasing. Today Spain's economy is lifeless.

But the government must keep selling bonds. It needs money to finance its budget deficit and repay maturing debt.

If confidence were to drop sharply, and borrowing costs went to 8 or 9 percent, then the appetite for Spanish bonds could evaporate, even among its loyal banks.

"At some point, if people stop financing you, you default," Varela says.

But Varela is betting on a different outcome. Because of Spain's size — it is the fourth-largest economy in the euro zone — he believes the ECB will eventually step in to buy Spanish bonds and break the co-dependency of banks and the government.