Spain’s bank audit to offer launchpad for aid request

(Reuters) – An independent audit on Spanish banks, which along with an austerity budget appears to prepare the way for a government bailout, is likely to show on Friday that troubled lenders need around 60 billion euros ($77 billion) to return to health.

However, the amount Madrid finally taps from a credit line already agreed with the European Union for recapitalizing banks will be significantly less thanks to a series of other measures, a government source said.

Spain, the euro zone’s fourth largest economy, replaced Greece, Ireland and Portugal earlier this year as the main threat to the survival of the euro currency project.

Battered by a deep recession, mass unemployment, indebted regions and crippled banks after a decade-long boom fuelled by a property bubble ended abruptly in 2007, the country secured the 100-billion-euro European lifeline for the banks in June, and has since then quietly laid the ground for a state bailout.

Both the 2013 budget presented on Thursday and results of the audit of Spain’s 14 main banks by consultancy Oliver Wyman are necessary steps for Madrid to request sovereign aid and trigger a bond-buying program by the European Central Bank.

The results of the banking audit are due in a news conference at the economy ministry at 6 p.m. (1600 GMT).

Economy Minister Luis de Guindos and banking executives said last week that the audit findings would be in line with preliminary estimates of 62 billion euros in capital needs for the banks, published in June.

A government source told Reuters the final figure should be between 55 billion euros and 60 billion euros. However, Spain will end up drawing less than this. “We could see something at around 40 billion euros,” said the source, on condition of anonymity.

This is because some banks are expected to be able to raise capital by themselves. Also toxic assets – such as loans for property projects which are unlikely to be repaid – will be transferred into a “bad bank” and bondholders will have to accept sharp reductions in the value of the debt.

Banking and official sources cautioned that the figures could shift in last minute talks on the parameters of the audit between the banks, the government, international creditors and Oliver Wyman.

Banking sources told Reuters that tax credits would probably not be taken into account, meaning capital needs for state-rescued lender Bankia could increase by 6 billion euros to 25 billion. This does not include an earlier public cash injection of 4.5 billion euros.

The figure would also go up for the three other nationalized bank CatalunyaCaixa, NovaGalicia and Banco de Valencia.

The business daily Cinco Dias reported on Friday that the banks considered as sound in the audit would be allowed the tax credits, but only by accounting for them over a five year period.

Spain is also bracing on Friday for a credit review – due before the end of September – from ratings agency Moody’s which currently rates Spain’s debt at just one notch above junk.


Another parameter that may influence the final audit figure is the economic forecast used to calculate the shortfall. The audit was based on an assumption that the economy would shrink 0.3 percent in 2013, but this already looks outdated as conditions quickly deteriorate.

Analysts and international bodies forecast a contraction of the economy of between 1.2 percent and 1.5 percent, closer to the adverse case scenario of a 2.1 percent recession next year.

Sources with direct knowledge of the process told Reuters this week that Oliver Wyman would stick to its base case and stressed scenarios, denying reports in Spanish media that the consultancy could use a tougher base-case scenario.

The same uncertainty over the economic outlook hangs over Spain’s 2013 budget. On Thursday the government stuck to forecasts released in July of a 0.5 percent recession in 2013 and of an unemployment rate of 24.3 percent which analysts unanimously say is untenable.

“The first reading is that this budget looks unrealistic,” said Soledad Pellón, analyst at IG Markets. “It is highly likely that the final adjustment for 2013 will be higher, given also that there are lot of doubts about whether the 2012 deficit target of 6.3 percent will be met.”

The government said the budget savings next year would come to 13 billion euros despite a 5 percent rise in pensions costs and a 34 percent surge in debt servicing costs.

Massive savings could be achieved in these areas if Spain were to seek aid, bringing immediate relief to lower its borrowing costs. The ECB has said it will buy the debt of troubled countries such as Spain to lower their bond yields, provided they apply for a sovereign bailout.

As it stands, the government expects to spend 39 billion euros in interest on debt next year and 122 billion euros in pensions, around 5.5 billion euros more than last year.

The EU has recommended that Spain review the solvency of its pension system, opening the door to the government overturning a law that indexes pensions to inflation every year, and accelerating the phasing in of an older retirement age.

The issue is part of talks with Brussels to prepare for a bailout, and the government acknowledged on Thursday the strains on the system when it tapped its social security reserves to the tune of 3 billion euros to pay pensions this year.

Government officials dodged reporters’ questions on Thursday on deeper changes to pensions, saying the inflation index is still in effect. ($1 = 0.7775 euros)

(Additional reporting by Robert Hetz; Editing by Fiona Ortiz and David Stamp)