Spain may today move closer to becoming the fourth euro-area nation to receive aid, a prospect that Moody’s Investors Service said might hurt credit ratings as the threat looms of a Greek exit from the single currency.
European Central Bank Vice President Vitor Constancio said yesterday that a Spanish request for a bank bailout is “awaited.” That bid may come as soon as today when finance ministers hold a conference call, said a German official and a European Union aide, who declined to be identified because the matter is confidential. The discussion may start about 1:30 p.m. Madrid time, according to a person with knowledge of the matter.
While Prime Minister Mariano Rajoy said June 7 he is talking to European leaders about how to shore up Spanish banks, he has resisted pressure to accelerate any request for help. The discussions underscore officials’ urgency on bolstering investor sentiment in the euro area as Greek elections loom and Spain struggles to persuade markets it can finance its budget deficit.
“Spain is the Rubicon that should have never been crossed,” Nicholas Spiro, managing director of Spiro Sovereign Strategy said in a note to clients. “Not only would a limited bailout for Spain fail to restore confidence in the markets, it could fuel fears that more aid will be needed at a later stage and could also put Italy under more pressure.”
Moody’s said it may review the ratings of several euro-area nations because of developments in Greece and Spain, where growing estimates of the cost of cleaning up banks may prompt a downgrade of the nation’s A3 rating. If Greece leaves the single currency, “posing a threat to the euro’s continued existence,” the company would review all euro-area sovereign ratings, including those of the Aaa nations, it said.
“As Spain moves closer to the need for direct external support from its European partners, the increased risk to the country’s creditors may prompt further rating actions,” Moody’s said in a statement.
Spain’s banking challenges are specific to the country and are still unlikely to threaten contagion to other euro members apart from Italy, Moody’s said.
Dutch Finance Minister Jan Kees de Jager said yesterday he doesn’t rule out the possibility that European finance ministers would discuss Spain today. The situation is “urgent,” he said in the Hague.
Constancio told reporters in Lisbon that the request should be made “with some rapidity,” and the ECB Executive Board member said the longer it is delayed, the higher the cost might be. Still, Rajoy said he won’t take a decision until he has received the results of stress tests by two international consultants, due by June 21, and a separate report from the International Monetary Fund.
Bankia’s new management asked for 19 billion euros of state support as they went beyond the government’s provisioning rules in their cleanup of the lender. Economy Minister Luis de Guindos said two weeks earlier that 15 billion euros would be enough to meet the requirements of the second of two banking decrees he has drafted this year.
Even as the government said Bankia was a specific case, investors extrapolated the losses to the rest of the industry, undermining confidence and the government’s credibility. De Guindos has told banks to take 84 billion euros in additional provisions and capital buffers in two decrees aimed at lending to the real-estate industry.
Spain is struggling to restore confidence in its banks as the government’s narrowing access to capital markets undermines its ability to provide a backstop. As foreign investors shun its bonds, the Treasury is increasingly dependent on Spanish lenders for funds. Adding to pressure, the nation’s credit rating was cut by Fitch Ratings to within two steps of junk on June 7.
Rajoy, who in November won the biggest majority that any Spanish party has clinched since 1982, is seeing his support slip as austerity measures and steps to bolster lenders fail to stem the crisis that has pushed the unemployment rate to 24 percent. Governments in Greece, Ireland and Portugal were toppled after those three countries took bailouts.
“This won’t be good news for Rajoy,” Jose Ignacio Torreblanca, head of the Madrid office of the European Council on Foreign Relations, said in a telephone interview. “There are questions on whether the government’s handling of Bankia has been deft enough.”
Deputy Prime Minister Soraya Saenz de Santamaria declined to comment when asked at a briefing yesterday whether Spain was seeking a rescue. She reiterated the government would wait until getting the reports before making a decision.
A bailout for Spain, reeling from a recession and the bursting of a property bubble, may dwarf previous rescues in the effort to stem the turmoil that began with Greece’s disclosure in 2009 that its finances were in worse shape than was previously known.
Since then, European governments and the IMF have made 386 billion euros in loan pledges to Greece, Ireland and Portugal. Spain’s economy is more than twice the size of the three countries combined. JPMorgan Chase & Co. economist David Mackie said on May 30 that aid for the Spanish government and banks could total 350 billion euros.