We had mentioned this earlier in the week [Jun 6, 2012: Reuters Reporting Germany Finalizing Aid Package for Spanish Banks] but the thought process was this would happen towards month end after a Spanish bank audit. However there now appears to be an urgency to this matter as EU officials want it done before Greek elections, in case those "go in the wrong direction". This probably explains the ramp in the markets in the latter part of the day as
those in the know "smart money" front run the news. As had been floated earlier, this would be a bailout straight to the banks of Spain, bypassing the Spanish government so as not to increase it's debt load – the issue in Ireland a few years ago. Effectively this looks like Europe-TARP…makes sense since Mr. Geithner was involved in talks last week and one of his minions has been involved in talks for a few weeks.
Well at least this frees up the normal Sunday evening bailout spot on the calendar…
- Spain is expected to ask the euro zone for help with recapitalizing its banks this weekend, sources in Brussels and Berlin said on Friday, becoming the fourth country to seek assistance since Europe's debt crisis began. Five senior EU and German officials said deputy finance ministers from the single currency area would hold a conference call on Saturday morning to discuss a Spanish request for aid, although no figure for the assistance has yet been fixed. Later the Eurogroup, which consists of the euro zone's 17 finance ministers, will hold a separate call to discuss approving the request, the sources said. "The announcement is expected for Saturday afternoon," one of the EU officials said.
- The dramatic development comes after Fitch Ratings cut Madrid's sovereign credit rating by three notches to BBB on Thursday, highlighting the Spanish banking sector's exposure to bad property loans and to contagion from Greece's debt crisis. "The government of Spain has realized the seriousness of their problem," a senior German official said.
- He added that an agreement needed to be reached before a Greek election on June 17 which could cause market panic and increase the threat of Athens leaving the euro zone if left-wing parties opposed to Greece's EU/IMF bailout win.
- Spain's deputy prime minister, Soraya Saenz de Santamaria, said the government needed to have at least a preliminary estimate of how much extra capital the banks needed before taking a decision. The International Monetary Fund is expected to announce imminently the results of its own audit.
- European Central Bank Vice President Vitor Constancio said the call for assistance was expected soon. "It is expected that Spain will formulate a request for aid exclusively for banks recapitalization … there has to be an expression of will to have such a program for Spanish banks, and one may hope it happens rather swiftly," Constancio said on Portuguese radio.
- If a request is made, Spain is expected to ask for help from the euro zone's 440 billion euro bailout mechanism, known as the European Financial Stability Facility. The amount will depend on the IMF audit and a separate report due by June 21 from two independent assessors, Oliver Wyman and Roland Berger. The process is likely to involve bonds from the EFSF being injected into Spanish banks with no new capital raised, a euro zone official said on Friday. The bonds can then be used as collateral in operations with the European Central Bank, allowing the banks to access ECB liquidity.
- Officials in Spain said the parameters for the IMF and the private-sector audits were effectively the same, meaning Spain could make the request for aid on the basis of the IMF figures rather than having to wait for the other assessment.
- Speaking in Berlin, German Chancellor Angela Merkel said she was not pressing any country to take a bailout, saying it was up to Spain to decide what it wanted to do: "It's down to the individual countries to turn to us," she said. "That has not happened so far, and therefore (we) will not exert any pressure."
- Fitch said the cost to the Spanish state of recapitalizing banks stricken by the bursting of a real estate bubble, recession and mass unemployment could be between 60-100 billion euros ($75-$125 billion) – or 6 to 9 percent of Spain's gross domestic product. The higher figure would be in a stress scenario equivalent to Ireland's bank crash.
- Conditions in the plan would be light, related to the banks and would probably not add to the austerity measures and structural economic reforms which Prime Minister Mariano Rajoy's government has already put in place, EU and German sources said. A "bailout lite" would help salve Spanish pride. Spain is the world's 12th largest economy and No. 4 in the euro zone. EU and German officials have cited national pride as a barrier to requesting a full assistance program.
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