Spain is expected to ask Europe today for money to recapitalise its banks. But one credit ratings agency says the country will need significantly more than the IMF's estimated 40bn euros.
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Medium-sized Spanish banks need a cash injection of at least 40bn euros, according to an IMF report, and the estimate could rise considerably if problems spread to Spain's larger banks. Fitch, which has cut Madrid's sovereign credit rating by three notches to BBB, said it may take between 60-100bn euros to shore up Spanish banks.
"Going forward, it will be critical to communicate clearly the strategy for providing a credible backstop for capital shortfalls - a backstop that experience shows it is better to overestimate than underestimate," said Ceyla Pazarbasioglu, IMF deputy director of the monetary and capital markets department.
Any Spanish rescue could seriously deplete funds in the 440bn euro bailout mechanism, known as the European Financial Stability Facility. Greece, Ireland and Portugal have already tapped the fund. Italy is volatile and Cyprus said it could not rule out a request for a bailout. With Greece still without a government, there are fears the contagion could spread, causing greater damage to the world economy.
Spain is buckling under the weight of debt and 25 per cent unemployment. More than 4.7 million residents are unemployed and families are increasingly turning to squatting because they have been evicted and can no longer pay rent (see photo, left).
"When I saw myself ending up on the streets, I thought, how could it have got to this? It can happen to anyone, anyone. One minute you have a home and suddenly you end up on the street," said 56-year-old squatter Carmen Ferre.
Crunching the numbers
Spain is the world's 12th largest economy and fourth largest in the eurozone, so the impact of its banking crisis will be felt internationally. Madrid's bailout request will likely be made during a conference call of finance ministers on Saturday, Reuters said, citing officials in Berlin and Brussels. The Eurogroup of 17 countries will reportedly issue a statement after the call.
"It's important to respect the proceedings," Spanish Deputy Prime Minister Saenz de Santamaria told reporters at a news conference on Friday. He said Spain needed at least preliminary numbers showing how much it might cost to shore up banks exposed to bad property loans and Greece's imploding economy.
The European Commission's spokesman on economic affairs said on Friday that Spain had not made a request for aid. Meanwhile, Germany said there was no pressure on Spain to apply for money despite uncertainty in the markets.
"It's down to the individual countries to turn to us. That has not happened so far and therefore Germany will not exert any pressure," Chancellor Angela Merkel said after leaks about Madrid's financial straits.
Any deal is likely before the Greek general election on 17 June, which could increase the possibility of Athens leaving the eurozone if there is a victory by politicians opposed to terms of a European Union/International Monetary Fund bailout.
"If such a request were to be made, the instruments are there, ready to be used, in agreement with the guidelines agreed in the past," said Amadeu Altafaj, European Commission spokesman on economic affairs.
In Madrid, where the Spanish cabinet was holding its weekly meeting on Friday, a government spokeswoman told reporters that Prime Minister Mariano Rajoy has stated that he was awaiting the outcome of two additional external audits, expected in late June. Consultants Oliver Wyman and Roland Berger are expected to provide their reports by 21 June.
Any aid is expected to focus only on Spain's banks, crucial to avoid overstraining the eurozone's rescue funds. While funds would be paid to Spain from the EFSF, it remains unclear whether they will go directly to the Spanish state or to the government's bank assistance fund known as the FROB.
The sudden escalation of the Spanish banking crisis follows the nationalisation of lender Bankia. The deputy governor of the Bank of Spain reportedly told parliamentarians on Thursday that 9bn euros were also needed to cover losses at nationalised banks CatalunyaCaixa and NovaGalicia.
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 per cent of gross domestic product because of a deep recession.