MADRID -- Spain will ask for a bank bailout from the eurozone, becoming the fourth and largest country to seek help since the single currency bloc's debt crisis erupted.
Economy Minister Luis de Guindos said the aid will go to the banking sector only and thus does not come with new austerity conditions attached for the economy in general.
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He gave no figure as to how much Spain will request, saying that he would wait until independent audits of the country's banking sector have been carried out before asking for a specific amount.
The bailout for Spain, reeling from a recession and the bursting of a property bubble, may dwarf previous rescues in the effort to stem the turmoil that began with Greece's disclosure in 2009 that its finances were in worse shape than was previously known.
Since then, European governments and the IMF have made 386 billion euros in loan pledges to Greece, Ireland and Portugal. Spain's economy is more than twice the size of the three countries combined. JPMorgan Chase & Co. economist David Mackie said on May 30 that aid for the Spanish government and banks could total 350 billion euros.
"Spain is the Rubicon that should have never been crossed," Nicholas Spiro, managing director of Spiro Sovereign Strategy said in a note to clients. "Not only would a limited bailout for Spain fail to restore confidence in the markets, it could fuel fears that more aid will be needed at a later stage and could also put Italy under more pressure."
Spain has been toppled by its banking industry and one of the highest private debt levels in the euro region, even as its public debt remains below the European Union average. The country had budget surpluses in the three years through 2007, allowing it to go into the crisis with a debt burden equivalent to 36 percent of gross domestic product. That ratio was 69 percent last year.
The country has made at least four attempts to clean up its banks since the collapse of the real estate boom in 2008, tightening provisioning rules, encouraging mergers and coaxing lenders onto the stock market. The IMF said that "gradual approach" had allowed weak banks to undermine financial stability.
Constancio told reporters in Lisbon that the request for help should be made "with some rapidity." ECB council member Jens Weidmann urged Spain to request aid from the euro area's rescue fund if the country can't meet its financing needs, Die Welt am Sonntag reported, citing an interview.
The government shouldn't hold out against seeking help, the Berlin-based newspaper quoted Weidmann as saying. Hoping for the ECB to jump in to avoid conditions attached to a rescue "is the wrong way."
Still, Rajoy said he wouldn't act until he has received the results of stress tests by Roland Berger and Oliver Wyman, due by June 21, and has made repeated calls for European institutions to help bring down the nation's borrowing costs.
"The Spanish government was making noises to the effect that ECB was going to step in and Spain wasn't going to blink," said Ken Wattret, chief euro-region market economist at BNP Paribas SA in a telephone interview. "Well now Spain is going to blink."
"The cost to the credibility of the sovereign has been pretty high," he said.
Moody's Investors Service said late yesterday the increasing prospect of Spain seeking aid, as well as growing estimates of the cost of helping banks, may prompt downgrades to its A3 rating.
If Greece leaves the single currency, "posing a threat to the euro's continued existence," the company would review all euro-area sovereign ratings, including those of the Aaa nations, Moody's said.
The IMF report, which said the "core of the system appears resilient," said the 37 billion euros of capital needs estimated for weaker lenders could rise due to unanticipated losses. The assessment incorporated Bankia group, which was nationalized on May 9, and put its needs at 13 billion euros to 14 billion euros, compared with the 19 billion euros the bank's new management has demanded, the IMF official said.
Bankia group also went beyond the government's provisioning rules when calculating the need for 19 billion euros of state support, which comes on top of 4.5 billion euros it received in a previous bailout. Economy Minister Luis de Guindos said two weeks earlier that 15 billion euros would be enough to fulfill the second of two decrees passed this year.
Even as the government said Bankia was a specific case, investors extrapolated the losses to the rest of the industry, undermining confidence and the government's credibility. De Guindos told banks to take 84 billion euros in provisions and capital buffers, on top of 100 billion euros of provisions made since 2008.
Rajoy's failure to restore confidence in its banks has prompted foreign investors to shun Spain's bonds, making the Treasury increasingly dependent on Spanish lenders. Rajoy, who in November won the biggest majority that any Spanish party has clinched since 1982, is also losing support among voters as austerity measures fail to stem the crisis that has pushed unemployment to 24 percent. Governments in Greece, Ireland and Portugal were toppled after those three countries took bailouts.