Spanish bailout rumors abound

@CNNMoneyInvest June 9, 2012: 8:00 AM ET
Rajoy

Spanish Prime Minister Mariano Rajoy is under pressure to recapitalize the nation's banking sector.

NEW YORK (CNNMoney) -- Spain needs help to resolve a festering banking crisis and it seems increasingly likely that the nation will seek a financial rescue soon.

European Union officials are eager to resolve the issue before a pivotal election in Greece, which could present another major turning point in the long-running euro crisis.

Spain could make a request for financial aid this weekend, according to a report by Reuters, which cited EU and German sources. The wire service said Friday that finance officials from all 17 euro area nations will hold a conference call Saturday to discuss the rescue package.

But a spokesman for Jean-Claude Juncker, who heads the Eurogroup of finance ministers, told CNNMoney Spain has not yet requested financial assistance and that no conference call has been scheduled.

"Should Spain submit a request for financial assistance, all instruments are in place and ready to be used, following the agreed guidelines," the spokesman, Guy Schuller, said in a statement.

The Spanish government has said that it will not make a decision on its financial needs until after two assessments of the banking sector are complete.

Late Friday, the International Monetary Fund issued a report pegging the banks' capital requirements at €40 billion.

Spain has also commissioned an external audit of its banks, which is not expected to be concluded until later this month.

On Thursday, Fitch slashed Spain's credit rating three notches to 'BBB' from 'A.' The ratings agency pointed to the estimated cost of a Spanish bank bailout, which it said is likely to cost between €60 billion to €100 billion. Fitch also said it now expects a prolonged recession in Spain that will run throughout 2013.

The Spanish government has been struggling to contain a deepening banking crisis since it announced last month that one of the nation's largest banks, Bankia, needs a €19 billion bailout.

Shares of large Spanish banks that trade on U.S. exchanges have rebounded in recent days, but are still down sharply for the year. U.S.-listed shares of Banco Santander (STD) and BBVA (BBVA) have both fallen more than 20% year-to-date.

While Spain has a relatively low level of debt, it does not have the capacity to recapitalize its banks. Madrid has already signaled that it will not meet its deficit reduction targets this year as the Spanish economy has fallen back into recession.

In addition, Spain's borrowing costs have risen recently as investors demand an increasingly higher interest rates to lend money to the government.

The yield on 10-year Spanish bonds rose to a high of 6.6% last week, prompting a warning from the nation's Treasury minister that the government is in danger of being priced out of the market. But yields eased this week following a successful bond auction on Thursday and are now around 6.2%.

While there are still uncertainties about whether Greece will be forced to drop the euro following its upcoming parliamentary elections on June 17, the possibility of Spain needing help is a more pressing concern due to the size of the economy, the fourth largest in the eurozone. To top of page

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