As Spain edges closer to resembling equal misfortunes in Greece, Portugal and Ireland, the headlines are starting to flood media outlets touching the Ifs, Hows and What may happen if Spain is finally rescued by its European partners. And the bailout could happen as soon as this weekend according to Reuters as far as they have reported EU sources, including one German, suggested that during the weekend Spain would ask for aid to bailout its distressed banks.
The request is supposed to be put forward at a EU finance ministers' videoconference which will take place on Saturday. The Eurogroup would issue an official announcement afterwards. The Spanish government has denied the information yet as well as EU leaders.
Soraya Saenz de Santamaria, Spanish first vice president, said that "Spain has to wait for first auditors informs that will be released June 21 that will show banks necessities.
The country has been for quite some time at the fore of financial headlines as it struggles to clean-up its banking sector after news struck the country had limited means to recapitalize the partially nationalized Bankia.Spain's government spent over 4.5 billion euros to rescue Bankia back in early May as a chaotic collapse of the institution was looming. Later, further information transpired that the bank had requested an additional bailout of €19 billion, the largest bank bailout in the nation's history, after a shocking revised earnings statement for 2011, shifting from a 309 million euros in profits to a loss that amounts over 4.3 billion euros.
Mr. Market has ever since doubted on Spain's ability to cope with the recapitalization of its banking sector alone, as the nation struggles to raise the additional billions of euros on bond markets due to high yields, leading to prospects of scarce liquidity to face the mountain of fresh capital needed to clean-up Bankia and others institutions. To make matters worse, Standard & Poor downgraded Bankia's creditworthiness to "double-B-plus" recently, making it a junk bond and as a chain effect, Spain’s risk premium soared above the 500bp.
Spanish PM Mariano Rajoy warned last week the country is in a situation of “extreme difficulty”, while his budget minister Mr. Montoro admitted the high percieved risk of its government debt meant Madrid “does not have the door to the markets open.” These comments have brought forward the case that Europe helps Spain to inject an estimated €40bn for banking bailout.
Mr Montoro said the sum is not 'astronomical', but the problem lies on "where to get the funds from." It is for the best of Europe to extend a hand to Spain, he said. “It’s not a procedure to help anyone in particular but to promote a European banking union so that we have a European financial system with the same guarantees for all.”
How much capital banks really need?
While the International Monetary Fund agrees Spanish banks may require €40bn in fresh capital, regular contributor at FXstreet and renowned Euro crisis observer at Roubini Global Economics, Ms, Megan Greene, said her estimations are that Spain's banks will need up to €250bn, a claim six times the amount officially disclosed. She has the support from Ambrose Evans-Pritchard, International business editor at The Telegraph, who says the amount no longer looks extreme.
Spain and Germany hit an impasse
Madrid aims for a outright injection of fresh capital into Spanish banks by the Eurozone's €500bn rescue system. The impasse is that despite having moral support from the European Commission, neither the temporary bailout fund nor the soon-to-be effective permanent facility are designed to make direct contributions towards the banks.
Besides, Germany, as the main contributor to the bailout fund – has veto power - , resists to the idea of changing the ESM treaty to allow direct bank recapitalization. Berlin hard-line stance, as explained by government spokesman Steffen Seibert, is that “it is only for a national government to decide whether it draws on the rescue mechanism and the requirements that are linked to it. That of course is also true for Spain."
Under current rules, Spain opposes to seek an international loan from the European rescue fund, or EFSF, as it represents having to comply with tough measures and intrusive supervision, which would suffer the humiliation of EU-IMF "Troika" inspectors and probably make them lose part of its sovereign power. Besides, it would come with a high political cost for Rajoy. Ironically, the very same PM latest line over the weekend calls for a eurozone fiscal authority to manage member states’ budget policies, reinforcing the idea that the euro project is irreversible.
A compromise may be taking shape
Amid the rejection of Spain to having to come under a full EU/IMF adjustment program and toughen its belt-tightening measures to address the budget deficit, Germany appears to be considering a compromise – it will not breach current regulations governing rescue funds - in the form of a 'decaffeinated' bailout for Spanish banks, which would be subject to less demanding terms to those imposed on Greece, Ireland and Portugal.
As read in Spanish newspaper El Pais: “This compromise could consist of Spain’s state Orderly Bank Restructuring Fund (FROB) receiving European bailout funds and distributing them among the individual banks that require recapitalization. This would in practice comply with the restrictions imposed on the EFSF and the ESM that require national governments to apply on the part of its lenders for funding. Any funds received would be for the exclusive use of Spain’s banks and the conditions imposed could be restricted exclusively to the banking sector."
Is a banking bailout to Spain imminent?
It seems quite likely that Spain is heading towards requiring significant funds to the international community. Early signs is that the potential intervention may just involve some sort of direct recapitalization of the banking sector in order to avoid a disaster scenario. Varies sources familiar with current negotiations being conducted behind close doors have hinted the master plan is set to take final shape at the European Union summit of the bloc’s leaders on June 28-29.
In the meantime until the D day, the Spanish government is awaiting to receive further insights from an IMF report on the banking sector as well as the results of the audits being carried out by Roland Berger and Oliver Wyman within 10 to 15 days. “Most likely they will be similar to those of the IMF,” he said. “Thereafter, the Spanish government will take the decisions it needs to take with regard to the recapitalization of the banks.” Only after fresh information on the state of banks finances is available, the government will decide the amount it may be needed.
Is a full-scale bailout to Spain coming?
Odds are growing Spain will ultimately make a formal request to tap the EZ rescue fund, although the prospects still look somewhat distant. Before that happens, Spain is likely to exhaust all the different and less dramatic venues before no ammunition is left but having to be granted aid in the framework of a reform program. Readers should have little doubt amid absence of economic growth, Spain will eventually be forced to request official aid, “potentially as early as next year" Ms. Megan Greene said.
As a déjà vu of similar scenes in other peripheral countries, unless Spain borrowing costs come down significantly, they will be cornered as the self-defeating austerity cycle continues its course, with austerity only exacerbating prospects of contraction, resulting on the need to even more austerity and ratcheting up the debt/GDP ratio.
In late May, I explained that in the context of the crisis, Spain has always been a wolf on sheep's clothing and as stated: “We are experiencing a very risky transition potentially to be classified as a true game changer on how the crisis is managed should the headlines continue heading mercilessly towards Spain.” That transition is here, is happening now, and is extremely dangerous indeed.
The time for the bail out, sooner or later, is likely to come to Spain as it fails to restore credibility. If one I to be guided by the market behaviour, it has issued its own verdict, one that is plagued with utter distrust towards the Spanish economy as it keeps asking returns above 6% to insure the the lending of money to the government in a 10 year horizon.
Where Spain bailout money may come from?
No one knows exactly where to get all the funds potentially needed. Spain is definitely too big too fail, with economist predicting that if a final rescue package ever reaches Spanish shore, it may 'morph' into a full-blown rescue between €370bn and €450bn over time - by far the largest in world history. Simon Derrick from BNY Mellon said: "Half-measures are not going to work at this stage and it is not clear that the funding is available."
As explained by Christophe Frankel, the EFSF's chief financial officer: "There is sufficient fire-power available. In addition, the EFSF/ESM can leverage resources."
What Mr Frankel forgets is that Spain would no longer be classified as a creditor of the EFSF the moment it asks for funds. As a result, the share to put in by main contributors - Italy, France and Germany – will have to raise risking the credibility of the guarantees given, thus EFSF bonds may see a collapse, causing turmoil on the European sovereign debt markets.
Meanwhile, Mr. Lou Jiwei, the chairman of the China Investment Corporation has said the big panda's sovereign wealth fund will not commit to any more buys of European debt until the region takes radical steps to restore credibility. "The risk is too big, and the return too low. Europe hasn't got the right policies in place. There is a risk that the euro zone may fall apart and that risk is rising," he told the Wall Street Journal.