Spain seeks bank bailout

MADRID – 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 $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 $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 euro.”

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 be “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 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 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 downgraded its credit ratings on 28 Spanish banks late Monday. 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.

Also on Monday, Cyprus became the fifth eurozone country to request financial aid from its partners in the troubled European currency union as it struggles to shore up banks that took heavy losses on Greek debt.

The island nation’s government said in a terse statement that it required assistance following “negative spillover effects through its financial sector, due to its large exposure in the Greek economy.”

Government spokesman Stefanos Stefanou declined to specify an amount being sought.