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Eurogroup to discuss Spain bank bailout at 1400 GMT

June 09, 2012

Mario Draghi—AP Photo
Mario Draghi—AP Photo

BRUSSELS: Eurozone finance ministers will hold a conference call at 1400 GMT on Saturday on Spain's expected request for aid to shore up its distressed banking sector, European officials said.

The eurozone green lighted the “holding of a teleconference of the Eurogroup on Saturday at 4:00 pm to agree a declaration on Spain's intention to request aid and the Eurogroup's commitment to granting it,” one European government official said.

“There is no timeline and no choice of instrument (for recapitalising Spanish banks) either,” the source said.

The 17-member eurozone expects the Spanish aid request “any time now,” said another official who also asked not to be identified.

Spain will be the fourth country to request financial aid since the start of Europe's sovereign debt crisis two years ago.

Ahead of the conference call, top eurozone officials of the Euro Working Group, made up of senior finance ministry officials, were holding preparatory talks early Saturday.

The International Monetary Fund has said Spain's banks need about 40 billion euros new capital to resist severe financial shocks.

Stress tests performed by the IMF on the country's battered banking sector indicated the top two banks, BBVA and Banco Santander, were solid.

But the rest of the banking sector could not measure up to official banking capitalisation standards in the case of a sharp continuing contraction of the Spanish economy.

“Under the adverse scenario, the largest banks would be sufficiently capitalised to withstand further deterioration, while several banks would need to increase capital buffers by about 40 billion euros in aggregate to comply with the Basel III transition schedule,” the IMF said in a statement Friday.

But that would not be enough to cover other restructuring costs and loan portfolio downgrades, the statement said.

Speaking on background, an IMF official said the banks would likely need a lot more to ensure there was a “credible backstop” in worst-case scenarios.

“In our view the stress tests are a good indicator but they are basically a floor for what you would probably need,” the official said.

Often, the official said, in order to convince markets of the strength of the banks they would need a buffer of 1.5 to two times the level of new capital mandated under the stress test.

“Usually you come up with a buffer ... large enough to convince markets so that people don't say, oh well, what if this happens, what if the growth is even worse?”

The stress test results were originally scheduled to be released on Monday, but were moved ahead as European diplomats said Spain would likely move Saturday to begin crafting a deal for an EU rescue of its banks.