Spain’s request for as much as 100 billion euros ($125 billion) of European bailout funds should provide the country with enough money to shore up its banking system after three failed attempts in as many years.
“Now that they have this money, it will hopefully finally be possible to recognize all the hidden losses and clean up the system,” Luis Garicano, a professor at the London School of Economics, said in a phone interview.
The amount sought is about 2.7 times the funds deemed necessary for Spanish banks by the International Monetary Fund in a report released June 8. Spain sought aid for its banks the following day, becoming the fourth euro member to seek a bailout since the debt crisis began almost three years ago.
The rescue request followed weeks of escalating concern that bad loans at Spain’s banks might overwhelm public finances. The Spanish crisis, coinciding with the prospect of Greece exiting the euro after elections on June 17, roiled financial markets around the world, sending the euro to an almost two-year low on June 1 and raising Spanish borrowing costs to near euro- era records.
Mariano Rajoy, who took office in December and denied the need for a banking bailout as recently as May 28, will be under scrutiny as his government tries to complete the cleanup after past efforts fell short. Doubts also remain whether the funds to shore up banks will be enough to fix Spain’s indebtedness, especially with the economy in recession and an unemployment rate higher than 24 percent.
“We view this as a positive near-term development for Spain, and in particular for its banks,” Andrew Benito, senior European economist at Goldman Sachs Group Inc. in London, said in a note yesterday. “But it does not solve Spain’s overall fiscal and macroeconomic challenges, which remain substantial.”
Santander, BBVA

Apart from Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA, Spain’s two biggest banks, and perhaps Banco Sabadell SA, almost all Spanish lenders may be short of capital, said Daragh Quinn, an analyst at Nomura International in London.
Santander and BBVA (BBVA) have been tarred by the nation’s banking woes even though they generate most of their revenue outside the country. Santander declined 34 percent in Madrid trading in the past 12 months, while BBVA fell 30 percent. They may benefit from the bailout if it cuts their funding costs and leads investors to recognize their relative strengths, said Quinn.
Europe will lend the money to Spain’s bank-rescue fund, which will channel it to the banks based on the findings of reports by two independent auditors that are scheduled to complete a stress test of lenders by June 21, Economy Minister Luis de Guindos said at a June 9 news conference in Madrid.
‘Wonderful Opportunity’

Spain pushed for a funding “cushion” over and above what the industry may need because the “message it sends to the market is much clearer and more forceful,” Rajoy told reporters in Madrid yesterday. The IMF, in the June 8 report, said Spanish banks would need at least 37 billion euros to withstand a weakening economy.
While the rescue plan may provide a respite to Spanish debt and the euro, whether it proves a success will depend on execution.
“What a wonderful opportunity Spain has to sort all this out,” said Simon Maughan, a financial industry analyst at Olivetree Securities in London. “But I’m afraid they’re going to squander it.”
Only a commitment by Spain to buy bad assets from lenders and manage them in a so-called bad bank will cure the ills of the country’s banking system, Maughan said.
Affecting Banks

“The money is there but the question is now how are you going to use it,” Maughan said in a phone interview. “If this money actually goes into the banks and allows for proper writedowns, then great -- but if just sits on their balance sheets, the uncertainty will continue.”
De Guindos and Rajoy both said conditions on the loans from Europe would apply only to the banks that take the money and wouldn’t affect the government’s economic or fiscal policy. Spain is already pruning state spending and raising taxes to tackle a budget deficit that is the euro-area’s third-largest at 8.9 percent of gross domestic product.
Before the bailout announcement, Spain’s bank-rescue fund, known as FROB, had about 5 billion euros in cash. That compares with the 19 billion euros in state support sought by the Bankia group, Spain’s third-biggest lender, which was nationalized last month. The 100 billion euros from Europe helps remove doubts about funding the recapitalization of the banks that do need more money, said Nomura’s Quinn.
Needing Help

The next questions are which lenders will require the funds and how much they’ll need. Spanish authorities will weigh the findings of the IMF and the independent auditors, Oliver Wyman Ltd. and Roland Berger Strategy Consultants. The Bank of Spain, the country’s banking regulator, was accused in the IMF report of being too slow to tackle weaker lenders, a failure that allowed “growing vulnerabilities” to develop.
“They will want to remove the uncertainty,” said Quinn. “The fact there is 100 billion euros means that there isn’t the same financial limitation on enforcing the provisioning needs that may be shown up in the audits.”
In addition to Madrid-based Bankia, nationalized lenders that need support include CatalunyaCaixa and Banco de Valencia, seized last year. The IMF’s report said some former savings banks that haven’t taken government money, as well as medium and small private sector banks, may post losses this year after provisioning for bad loans.
Analysts have been applying the level of provisioning planned by Bankia across the industry to determine which other lenders may be vulnerable.
Irish Solution?
Banco Popular Espanol SA (POP) may need to set aside an additional 3.8 billion euros to take loan-loss provisions to the levels planned by Bankia, according to Santiago Lopez, an analyst at Exane BNP Paribas. Popular, which holds a shareholders’ meeting today, insists it doesn’t need state aid. The Madrid-based lender said in a June 6 filing to regulators that it would earn a total of 905 million euros in profit this year and next as it uses asset sales to fund provisions for bad loans.
For Maughan of Olivetree, Spain’s best chance of restoring confidence in a banking system burdened by more than 180 billion euros of toxic real estate assets would be to remove them from the lenders’ balance sheets. The Irish government, which sought a bailout in 2010, funded a bad bank to take real estate off lenders’ books, forcing write-downs of 58 percent.
“The Irish forced the banks to take write-downs by saying we will take your loans off your balance sheet for you and we will buy them at 35 cents on the euro,” said Maughan. “If you really want to stand up and be credible and say 100 billion euros is the right number, use the money to take the bad loans off the banks.”
To contact the reporter on this story: Charles Penty in Madrid at [email protected]
To contact the editor responsible for this story: Frank Connelly at [email protected]