Spain's troubled banks could need as much as 62 billion euros

Spain's troubled banks could need as much as 62 billion euros ($78.6 billion) in new capital to protect themselves from economic shocks, according to independent auditors hired by the government to assess the country's struggling financial sector, officials said Thursday.

The Spanish government will use the auditors' report as the basis for their application for a bank bailout loan from the 17 countries that use the euro. With tensions rising over the future of the eurozone, Spain is expected to submit its specific request for outside assistance no later than Monday, said Jean-Claude Juncker, who chairs meetings of zone's finance ministers.

"We invited Spain to pursue this clear and ambitious strategy, which needs to be implemented swiftly and communicated early," Juncker said after Spanish Economy Minister Luis de Guindos presented the audit results to the ministers who are members of the so-called Eurogroup.

Deputy Bank of Spain Governor Fernando Restoy noted that this worst-case scenario cited by the auditors was far below the 100 billion euros ($126.7 billion) loan offered by the eurozone's finance ministers two weeks ago.

Spain's banking sector is struggling under toxic loans and assets from the collapse of the country's property market in 2008. Concerns that Spain's economy is so weak that it could not afford the cost of propping up its banks has sent its borrowing costs soaring to levels not seen since it joined the European single currency in 1999.

The worry is that Spain could soon find itself unable to finance its debts by itself and join Greece, Ireland and Portugal in seeking a rescue loan for not just the banks but the whole country.

The stakes are huge: Spain is the eurozone's fourth-largest economy and would seriously hit the bloc's finances should it need bailing out. The country is struggling through a recession with a 24.4 percent jobless rate.

On top of this, government's main customers at its debt auctions are Spanish banks, the sector now being bailed out. In a sign of how reluctant the markets are to invest in Spain, the country had to pay sharply higher interest rates to raise 2.2 billion euros ($2.8 billion) in a bond auction Thursday.

The audits of Spain's lenders, carried out by consultancies Roland Berger and Oliver Wyman, covered 14 banking groups that account for 90 percent of the country's financial sector. The country will use the reports' findings to decide how big a bailout loan to ask for.

Restoy and Deputy Economy Minister Fernando Jimenez Latorre declined to outline individual banks' needs.

In the auditors' stress test for the worst-case economic scenario, a fall in gross domestic product of 6.5 percent over the period 2012-2014, most of the banks were deemed to be in a "comfortable" position, Restoy said.

"We're not talking about the imperative capital necessities of the banks. We're not talking about someone urgently needing such and such an amount of capital to deal with their obligations," said Restoy. "We're talking about the capital that would be needed if we were to see a situation of extreme tension which is very unlikely to come about."

"We should keep in mind we are not talking about how much capital an entity needs to survive. We're talking about how much capital an entity will need to confront a situation of extreme stress," he added.

Confidence

Eurozone finance ministers offered Spain a bailout loan of up to 100 billion euros on June 9. The terms of the loan, for which Spain, rather than banks, will ultimately be responsible for, still have to be negotiated.

Spanish Prime Minister Mariano Rajoy hailed the audit results during a visit to Brazil as an important move toward restoring international confidence in Spain, currently seen as one of the eurozone's weakest links.

"It's a decisive step in the right direction because it makes an accurate and credible diagnosis that fences in the capital needs in manageable margins and ensures that the financial assistance made available to Spain by our European partners is more than enough to solidly clean up our financial institutions," Rajoy said in Sao Paulo after meeting with business leaders.

Oliver Wyman Inc. gave a worst-case range of 51 billion euros to 62 billion euros in new capital needs while Roland Berger Strategy Consultants GmbH gave a single
figure of 51 billion euros.

Market nervousness

The release of the audits probably won't erase market nervousness about Spain, said Mark Miller, an analyst with Capital Economics in London. "At face value it looks as if there is a reasonable safety margin given that up to 100 billion euros is potentially available," he said. "Having said that, the extent of the economic situation in Spain could even deteriorate beyond what is being described as an adverse scenario."

Some investors will likely still be nervous over whether the auditors' reports discovered most if not all of the toxic assets on the balance sheets of Spain's banks, Miller said. And their fears are compounded by concerns that Greece might still end up having to leave the single currency, further destabilizing the eurozone and especially Spain.

The results of the audits are good news for Spain because both companies came up with similar numbers and the overall figures were lower than some estimates of the banking sector's recapitalization needs, said Gayle Allard, an economist with Madrid's IE Business School.

"I think it's a fantastic result because there was talk of needs of 70 billion euro to 80 billion euro and that the loan could have been for 100 billion euro," she said.

Investors could still easily find something to scare them about the results, Allard said, "but I don't think there's any reason to do so."

She added: "The audits have come in better than anyone has expected, there's still some uncertainty, but if both of them are coming to the conclusion of those numbers we've got to be in the ballpark."