Euro-zone governments were running through their crisis toolbox Friday to find the best way to support Spain and its ailing banking sector, as investors continued dumping the country’s bonds.
Senior finance ministry officials from the euro zone and other EU countries were set to discuss several options for financial aid for Madrid in a telephone conference Saturday morning, an official from a euro-zone country said Friday.
That discussion could be followed by a conference call between euro-zone finance ministers, the official added, although that debate hadn’t been confirmed. He said the exact form, timing and size of the aid was still up in the air. The Saturday conference call was first reported by Reuters.
Spain is reeling from a collapse of property prices that has left many of its banks with a rising number of bad loans. Its economy is expected to shrink 1.8% this year, and one out of four workers is unemployed.
Thursday night, Fitch Ratings cut Spain’s credit rating by three notches to triple-B, triggering a further selloff of the country’s bonds and shares Friday.
Other euro countries have been pressuring Spain to sort out the problems in its banking sector, and the country has asked two independent consultants, Germany’s Roland Berger and Oliver Wyman of the U.S., to go through banks’ books to find out how much extra capital they need to absorb looming losses.
A report from the International Monetary Fund found that lenders would have to set aside an extra €37.1 billion ($46.6 billion) to cover losses if the bad economy persists, a person close to the situation said Thursday. That is in addition to €84 billion loan-loss provisions that the Spanish government previously asked local banks to set aside by the end of this year. Other assessments have pointed to capital shortfalls of €50 billion to €60 billion.
Spain’s deputy prime minister, Soraya Sáenz de Santamaria, said Friday that her government wouldn’t ask for help until the IMF and external auditors have presented their analyses. The IMF report is due Monday. A first evaluation from its consultants will be released June 21 and a second evaluation should be done by July 31, the government said.
European officials, however, questioned whether Madrid could hold out that long. “Given the developments in the market they would need to act very quickly,” said the official who confirmed Saturday’s call, pointing to Thursday’s downgrade and rising interest rates on Spanish bonds.
A second European official said there was a general feeling in the euro zone that urgent action was needed. “It’s a good thing if this is done now,” he said. “It has been obvious for a long time that we had a problem with Spanish banks, the situation has been deteriorating, and we need to come up with a plan that’s credible.”
He added it would be necessary to “plan for the worst,” but that a precise figure on the size of the aid could only come after all audits and a stress test on the banks had been carried out.
The first official said the euro zone was currently looking at several ways in which Spain and its financial sector could be supported. Of those options, a loan from the euro zone’s current rescue fund, the European Financial Stability Facility, targeted at the banks looked the “most feasible.”
In contrast to the bailouts that have already gone to Greece, Ireland and Portugal, bank support from the EFSF comes with much fewer strings attached. Even though any financial aid will still have to be channeled through the government—and thus likely add to its debt load—conditions attached to the rescue could be limited mostly to the banking sector. They could include much tighter supervision and more direct intervention, according to the EFSF’s legal guidelines.
A third European official said that undercapitalized lenders may receive EFSF bonds instead of cash, which would save the fund from quickly having to raise large amounts of money on debt markets. EFSF bonds were used to shore up Greek banks hit hard by losses on Greek government bonds.
Spain has been hoping to put off a request for help until the euro zone’s new bailout fund, the European Stability Mechanism, comes into force later this year, the official said. Although the ESM also can lend only to governments under its current rules, finance-ministry officials had been exploring ways to prop up Spain’s banking sector without immediately contributing to the government’s debt load.
Spain’s troubles escalated last month when it mounted a €19 billion rescue of Bankia SA. Given the modest amount of money available in Spain’s own bank-bailout fund and the government’s already high borrowing costs, the Bankia move spooked investors and exacerbated the country’s financing squeeze.
“The Spanish economy faces severe obstacles to its ability to obtain external financing,” Bank of Spain Gov. Miguel Ángel Fernández Ordóñez warned Friday at the presentation of the central bank’s annual report.
—Jonathan House and David Román in Madrid, and Vanessa Mock and Matthew Dalton in Brussels contributed to this article.