Spain’s banks need 62 billion euros

Spain needs up to 62 billion euros
Spain needs up to 62 billion euros

In preparation for making an official request for a capital injection into it’s banking system Spain’s independent audit, required by the EU, has been completed.

Two independent audits by consultants Roland Berger and Oliver Wyman found the requirement for Spain’s banks to be between 51 and 62 billion euros, substantially less than was originally thought.

The 100 billion euros approved last week will provide Spain with a margin for error allowing the banking sector to cope with unforeseen circumstances or further losses. However, Spain has said that it’s three largest banks would not need extra capital even in a stressed scenario. The government also added that they would not close any more banks and those in trouble would be restructured.

In a meeting in Luxembourg yesterday European finance ministers agreed Spain should first apply to the euro zone’s temporary rescue fund, the European Financial Stability Facility. That loan would then be taken over by the permanent bailout fund the European Stability Mechanism (ESM) once it is up and running in July.

“The financial assistance will be provided by the EFSF until the ESM becomes available, and then it will be transferred to the ESM,” Jean-Claude Juncker, chairman of the Eurogroup of finance ministers, said in a news conference.

“We would expect the Spanish authorities to put forward a formal request for financial assistance by next Monday,” he added.

Should Spain default then this loan would have to repaid first with all other creditors being pushed down the pecking order. However, because the loan will originate from the EFSF it will be issued without that requirement.

Yesterday Madrid sold 2.2 billion euros in medium-term bonds, attracting strong interest from domestic banks. Yields on 5-year bonds rose to a 15-year high of 6.07%, a level some analysts suggest is unaffordable for any prolonged period.

“They raised 2.2 billion versus a 2 billion target, so they can raise the money,” said Achilleas Georgolopoulos, a Lloyds of London strategist.

“Then the question is; are the yields threatening for the medium term? And yes, clearly they are much higher than the previous auction … But still they can continue for a few months to fund at these levels.”