Spain: Bank bailout decision could come soon

Spain could decide within days or weeks to ask for a bailout for its troubled banking sector, a step that would make it the fourth country in the 17-member eurozone to seek help since the EU debt crisis broke out.

Deputy Prime Minister Soraya Saenz de Santamaria said the government would not act until it receives a raft of reports on how much money Spain needs to save its banks from collapsing under the weight of soured real estate investments.

An International Monetary Fund report was released late Friday, and two independent auditor surveys were due by June 21. She said no decision on a bailout had been made at Friday's Cabinet meeting.

"Once the estimates of the numbers are known with regard to what the financial sector might need, the government will state its position," she said.

"But in any case, I am telling you that no decision has been made either way," she added.

Saenz de Santamaria declined to say how much the sector, hit by the collapse of the country's real estate bubble, might need. Estimates of the cost of bailing out Spain's banks vary greatly, from €40 billion ($49.87 billion) to as much as €100 billon.

The International Monetary Fund said it estimated that Spanish banks need at least a €40 billion ($49.87 billion) capital injection following a stress test it performed on the country's financial sector.

Commenting on reports that 17 eurozone finance ministers will hold a conference call the Saturday on Spain, Saenz de Santamaria said that "no meeting is planned" but would not confirm or deny whether some kind of communication would take place.

The Spanish government appears to have resigned itself to the fact that it needs a bailout with money pumped in from Europe to prop up its struggling banks, and can't handle the job on its own.

Prime Minister Mariano Rajoy has moved on from firmly stating that "there will be no rescue of the Spanish banking sector" 10 days ago to avoiding ruling out seeking external help for the banking sector of the eurozone's fourth largest economy.

Spain has been criticized for being too slow to set out a roadmap to resolve its problem. European business leaders and analysts have stressed that Spain must find a solution quickly so that it is not caught up in any market turmoil sparked by the Greek elections on June 17. There are concerns that anti-bailout left-wing party Syriza could become the largest party in the Greek parliament, putting the country's membership of the 17-nation eurozone at risk.

"What we now crucially need is transparency and trust," said Andreas Schmitz, the head of Germany's banking association. "Any further uncertainty, any speculation how the situation could develop is poisonous for the markets."

But others said it's more important for Spain to correctly assess how to shore up its banking system than it is to hurry into a bailout ahead of the Greek elections. The audits that Spain's government is waiting for are crucial to determining precisely how much capital the nation's troubled banks need, said Mark Miller, an analyst with Capital Economics in London.

"Any notion of rushing, that would be very unwise, in fact I think it could make things much worse," he said. "I think it's important to get it right rather than simply say that there is a rather appealing idea of a one-week window of opportunity, relative to getting a solution ahead of Greek elections."

If Spain doesn't get a request for outside help right the first time, "then you are in second bailout territory," Miller said.

Working in Spain's favor is the fact that its public debt is actually quite low, at 68.5 percent of its gross domestic product at the end of 2011.

Its debt is predicted to hit 78 percent by the end of the year, but even that figure would be below the debt-to-GDP ratios of Europe's strongest economy, Germany.

"The one thing Spain has in its favor is that its debt to GDP ratio is lower than it is in Greece, Ireland and Portugal, the other bailout countries," Miller said. "From a debt sustainability point of view this buys Spain more time even though Spain's borrowing costs are very, very high at the moment."

But Spain's economy is in terrible condition. It is in its second recession in three years, unemployment is nearly 25 percent and there is little hope for improvement this year. Rajoy's government has imposed a wave of austerity measures since he took office in December that have raised taxes, made it cheaper to hire and fire workers and cut government funding for education and health care.

If Spain asks for a bailout and taps the Europe's rescue facility, the European Financial Stability Facility, the move could raise larger questions about the Spanish government's ability to keep refinancing its debts in the bond market, analyst Ralph Solveen at Commerzbank wrote in a note to investors.

"After all, Spain would be admitting by such a request for support to banks that it can no longer finance itself for all purposes on the market," Solveen said.

Investor doubts about a country's ability to maintain its debts can lead to higher borrowing costs, which in turn undermine the government's ability to finance itself. Greece, Ireland and Portugal have all fallen victim to such market doubts and were forced to take bailouts from the other eurozone countries.

A Spanish bank bailout could also turn market focus to Italy, which has the second-highest debt load in the eurozone after Greece at some 120 percent of gross domestic product. Italy's budget is in better shape but its growth prospects have sagged and the willingness of Italian politicians to tackle the country's long-standing problems with choking bureaucracy, taxes and regulation remains in doubt.


Harold Heckle, David McHugh and Geir Moulson contributed to this report from Madrid, Frankfurt and Berlin.