According an independent audit, Spain’s banks will need an injection of 59.3 billion euros ($76.3 billion) to survive a serious downturn.
The amount is broadly in line with market expectations of 60 billion euros, and follows so-called stress tests of 14 Spanish lenders.
Much of the money is expected to come from the eurozone rescue funds, the current EFSF and the future ESM.
Spain said in July that it would request eurozone support for its banks.
The Spanish banking sector has been in difficulty since the global financial crisis of 2008, and the subsequent bursting of the country’s property bubble and deep recession.
Spain’s banks will need an injection of 59.3 billion euros to survive a serious downturn
The European Commission welcomed the announcement, saying in a statement that it “is a major step in implementing the financial-assistance programme and towards strengthening the viability of, and confidence in, the Spanish banking sector”.
It added: “The necessary state aid provided to Spanish banks will be determined in the coming months.”
The Commission also said that it expected the first Spanish banks to start receiving the loans “by November.”
Christine Lagarde, managing director of the International Monetary Fund, praised the independent valuation of Spain’s banks, saying it had been “thorough and transparent”.
She added: “Public funding of the banks’ actual capital needs, which are expected to be lower than the amounts identified in the stress tests, can be financed comfortably under the recapitalization programme supported by Spain’s European partners.”
The audit calculation that Spain’s banks will need 59.3 billion euros is a worst-case scenario, and does not take into account any future plans by the lenders themselves to raise their own capital.
The country’s economy minister Fernando Jimenez Latorre indicated that it may need to borrow about 40 billion from the eurozone rescue funds.
Bankia was found to be the bank most in need of additional capital, requiring 24.7 billion euros. It was followed by Catalunya Bank (10.8 billion euros), Novagalicia (7.2 billion euros), Banco de Valencia (3.5 billion euros), Banco Popular (3.2 billion euros), Banco Mare Nostrum (2.2 billion euros), and Ibercaja-Liberbank-Caja (2.1 billion euros).
Seven Spanish banks have no need for extra capital – Santander, BBVA, Caixabank, Kutxabank, Sabadell, Bankinter, and Unicaja.
The audit was also based on a number of assumptions, including that Spain’s economy will contract by 6.5% between 2012 and 2014.
The Open Europe think tank suggested many of these were overly optimistic, however.
“These tests do look to be more intense than the previous ones but ultimately the optimistic assumptions do instantly raise questions over their credibility,” the group said.
“The prediction that unemployment will peak at 27.2% seems optimistic given that there is plenty more austerity and internal devaluation to come while the structural labor market reforms are yet to take effect.”
It added that a worsening economic situation would also increase the number of loans which are defaulted on and hit the value of the foreclosed properties which banks own.
The bigger question remains whether the Spanish government will have to follow Greece, Portugal and the Republic of Ireland and request a full international bailout, involving loans that have to be paid off by the state, as well as close monitoring of its economy by its international creditors.
While Madrid continues to publicly deny this, the markets consider it only a matter of time.
On Thursday, the Spanish government announced its latest austerity budget. Against a backdrop of violent protests, it outlined new spending cuts, but protected pensions.
Spain is struggling with a shrinking economy and 25% unemployment.
Comments from its central bank earlier this week indicated that the country’s recession deepened in the past three months.
As tax revenues fall and benefits payments rise in a recession, this will make it even harder for Spain to get its finances under control.
Eurozone finance ministers have decided to lend Spain 30 billion Euros ($37 billion) this month to help its troubled banks.
It will be the first installment of a bailout of up to 100 billion Euros, which was agreed in June.
The ministers will need to get approval from their own parliaments and hope to make the payment by the end of July.
The eurozone finance ministers also agreed to extend the 2013 deadline for Spain to cut its budget deficit to the EU limit of 3% by one year.
The yield on Spanish bonds rose sharply on Monday ahead of the meeting, with many fearing that little concrete action on Spanish banks would be reached.
Eurozone finance ministers have decided to lend Spain 30 billion Euros this month to help its troubled banks
“We are aiming at reaching a formal agreement in the second half of July, taking into account national parliamentary procedures, allowing for a first disbursement of 30 billion Euros by the end of the month to be mobilized as a contingency in case of urgent needs in the Spanish banking sector,” Eurogroup President Jean-Claude Juncker said.
“There will be specific conditions for specific banks, and the supervision of the financial sector overall will be strengthened,” he added.
The exact amount that Spain needs for the bailout of its banks may not be known until September.
Jean-Claude Juncker also said that Madrid should implement measures needed to bring its public finances into line with EU norms.
On Saturday, Spanish Prime Minister Mariano Rajoy announced that he would take further steps soon to cut the country’s public deficit.
In a news conference at the end of Monday’s marathon meeting, a number of appointments were also announced.
The ministers reappointed Jean-Claude Juncker as their chairman and picked German Klaus Regling to head the permanent bailout fund, the European Stability Mechanism, which is due to come into force this month.
The conclusions of the finance ministers from the 17 countries that use the euro will be submitted to a meeting of all 27 EU finance ministers later on Tuesday.
On Monday, the yield on Spanish 10-year bonds, which are taken as a strong indicator of the interest rate the government would have to pay to borrow money, had risen above 7%, while Italian bond yields had reached to 6.1%.
Yields above 7% are considered to be unsustainable in the long term.
Eurozone finance ministers are to hold a conference call to discuss a bailout for Spanish banks.
EU sources say Madrid could formally request financial assistance for its troubled banks this weekend.
So far Spain has denied reports that an announcement on a European rescue plan for its banks is close.
The International Monetary Fund (IMF) is estimating that Spain’s banks need a cash injection of at least 40 billion Euros ($50 billion).
The IMF said on Friday that a “stress test” showed Spain’s financial sector was well managed but “vulnerable”.
The eurozone finance ministers’ conference call is expected early on Saturday afternoon.
In an interview on Portuguese radio, European Central Bank Vice-President Vitor Constancio said: “It is expected that Spain will formulate a request for aid exclusively for banks recapitalization.
“There has to be an expression of will to have such a programme for Spanish banks, and one may hope it happens rather swiftly.”
Eurozone finance ministers are to hold a conference call to discuss a bailout for Spanish banks
Spain is under pressure from Brussels to act, possibly before the feared uncertainty that could follow next weekend’s Greek elections.
However on Saturday morning, the Spanish government restated its position that it does not need outside help to shore up its banks.
“There has been no change,” a spokeswoman from the economy ministry in Madrid told AFP news agency.
Spanish Prime Minister Prime Minister Mariano Rajoy has insisted that any decision will come after the results of an independent audit on the Spanish banking system, which are due out within two weeks.
The audit will produce a figure of how much money, in total, is needed to prop-up Spain’s banks.
A rescue deal would see money passed first to the Spanish government and then to the troubled banks.
Because Madrid has already announced tough financial reforms it is likely that a deal would only carry limited conditions, our correspondent says, unlike the full-blown bailouts for Greece, Portugal and Ireland.
Reuters reported that eurozone deputy finance ministers would first hold a conference call on Saturday morning to discuss a Spanish request for aid.
The Eurogroup of finance ministers would then discuss the issue on another conference call, the news agency said, citing unnamed EU and German officials.
A downgrade of Spain’s creditworthiness by rating agency Fitch earlier this week has been seen by some as adding to the urgency of shoring up Spain’s finances.
European leaders have to make difficult decisions to steer the eurozone away from crisis, US President Obama said on Friday.
He said the US would support Europe as it implemented the hard solutions needed to solve the ongoing debt crisis.
He said a deep new recession in Europe would have an impact on the US economy.
Greece’s future in the eurozone was a matter for the Greek people, he said, but “further hardship” must be expected if the country chose to leave the euro.
Greeks will go to the polls on 17 June to try and end a political impasse that eurozone leaders say is harming Greece’s ability to tackle its economic crisis.
Spanish Economy Minister Luis de Guindos has dismissed talk of it seeking a bailout from the International Monetary Fund (IMF) as “senseless”.
And the IMF denied that Spain had asked to discuss rescue loans.
The IMF has contributed to bailouts of all the other eurozone nations, such as Greece, that needed help.
Meanwhile, the European Central Bank (ECB) president Mario Draghi described the current set-up of the eurozone as “unsustainable”.
There were rumors that Spain had already gone to the IMF, after the Spanish deputy prime minister went to meet the IMF’s managing director Christine Lagarde.
Spanish Economy Minister Luis de Guindos has dismissed talk of it seeking a bailout from the IMF as senseless
“My desire is to not come out and deny these rumours because they are senseless,” Spanish Economy Minister Luis de Guindos said on Spanish television.
Spain has taken Greece’s place as the epicentre of the eurozone crisis as concerns over the health of Spanish banks have shaken markets.
Bankia, Spain’s fourth largest bank, has asked for another 19 billion Euros recently from Madrid, but many question whether Spain will be able to afford it.
Speaking to the European Parliament, Mario Draghi said: “Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no. Can the ECB fill the vacuum of the lack of action by national governments on the structural problem. The answer is no.
“The next step… is to clarify what is the vision a certain number of years from now. The sooner this is specified, the better it is.”
And EU economics commissioner Olli Rehn said more austerity was needed if the eurozone was to avoid disintegration.
Olli Rehn talked down the idea of European states issuing joint bonds, saying that austerity and closer co-operation were needed.
“We need a genuine stability culture and a much upgraded common capacity to contain common contagion,” he told a conference.
New figures also showed eurozone inflation slowed more than expected this month.
Inflation in the 17 countries that use the euro eased to 2.4% in May from 2.6% in April.
The figure is still above the ECB’s target to keep inflation below 2%, but the lower-than-expected number could fuel calls for an interest rate cut next week.
In other figures released on Thursday, Germany’s unemployment rate fell below 7% as Europe’s biggest economy continued to perform strongly.
The jobless rate dropped to 6.7% in May, from 7% in April, as the number of people unemployed fell by 108,000 to 2.86 million.
However, there was more bad news from Greece as figures showed that Greek retail sales volumes fell by 16.2% in March compared with a year earlier. This followed February’s decline of 12.9%.
European stock markets had a shaky start on Friday as concern continued over Greece and Spain.
Spain’s main share index fell more than 2% before recovering, while shares in London fell by as much as 1%.
Confidence in European banks was undermined by ratings agency Moody’s, which cut the credit ratings of 16 Spanish banks late on Thursday.
It also cut the debt rating on Santander UK, a subsidiary of the Spanish banking giant.
However, shares in Santander reversed early losses to trade 3% higher, and Bankia shares jumped 9% following Thursday’s 14% slump.
Moody’s said there were several reasons behind the downgrade, including Spain’s slide back into recession, the financial challenges facing the Spanish government and bad loans in the property industry.
But Moody’s also recognized that banks had made progress in improving their financial situation, and noted the European Central Bank was providing support.
The proportion of loans that have gone bad at Spanish banks hit a record 8.37% in March.
That was according to figures from the Bank of Spain on Friday.
European stock markets had a shaky start on Friday as concern continued over Greece and Spain
Despite rising bad debts and downgrades, and reports of large withdrawals from troubled banking group Bankia, the Spanish government does not expect a run on the country’s banks.
Spanish Treasury Minister, Inigo Fernadez de Mesa, said: “This is a scenario I do not contemplate. The Spanish banks have plenty of liquidity. They have been funded through the central government for the next two years, so there is no problem of liquidity at all in Spain.”
Nevertheless, some investors moved money into German bonds, which are seen as low-risk investments. That drove the yield on 10-year German bonds down to 1.399% on Friday, a record low.
Confidence has also been knocked by the political crisis in Greece, where politicians are preparing for the second election in six weeks.
It is possible that the election on 17 June will result in a government that would refuse to implement the austerity measures that Greece’s last remaining international creditors are insisting on.
Speculation is increasing that Greece may have to leave the eurozone
The challenges facing Greece and Spain will be under discussion this weekend at the Group of Eight (G8) summit at the US Presidential retreat Camp David in Maryland.
President Barack Obama will host leaders from Britain, France, Germany, Italy, Russia, Japan, Canada, and the European Union.
“The G8 meeting in Camp David today and tomorrow will be used to pressure Eurozone politicians to take immediate and decisive action to stop contagion ripping the region apart,” said the Dutch bank Rabobank in a research note on Friday.
“Whether the meeting will bring any signs that eurozone politicians may be willing to allow Greek to exit the system remains to be seen, but this type of rhetoric would likely have to be pre-empted by policies designed to limit contagion tightening its grip on Spain,” the note said.
In Asia, stock markets registered heavy losses. Tokyo’s Nikkei average fell 3%, the biggest one day fall since last August.
Asian markets were also hit by losses in New York, where the Dow Jones closed more than 1% lower.
Investors were discouraged by two weak reports on the US economy.
“There is no resolution to the [European] problem yet, and we also we had very disappointing US data, so overall, it’s negative and further denting market sentiment,” said Frances Cheung, a senior strategist, at Credit Agricole CIB in Hong Kong.
In Asia, banking shares were hurt after the chief executive of ANZ said volatile market conditions meant that Australian banks were not lending to each other.
The wholesale lending markets are an important source of funds for banks.
“Right now, markets are closed again, and this is what happens in this sort of situation,” said ANZ chief executive Mike Smith.