Spain Requests $125 Bln Bailout

Spain became the fourth euro member to seek a bailout since the start of the region’s debt crisis more than two years ago with a request for as much as 100 billion euros ($125 billion) in loans to rescue its banking system.

“The 100 billion euros is the number that we were looking for so I’m cautiously optimistic,” Olly Burrows, credit analyst at Rabobank International, said in a telephone interview from London. “We still have to find a solution to the sovereign debt crisis: it’s not done yet and we still have to press on with the task of uniting Europe.”

Just seven months after winning a landslide victory, Prime Minister Mariano Rajoy was forced to abandon his bid to recapitalize Spanish banks without recourse to external help as a deepening recession forced lenders to recognize spiraling losses. Concern about the banks, which are hobbled with more than 180 billion euros in problematic real estate loans and assets, drove Spanish borrowing costs to near euro-era records last month.

Economy Minister Luis De Guindos announced the aid request yesterday after a three-hour conference call with his European counterparts. He said the terms of the rescue loans are “very favorable” compared with market rates.

The funds will be channeled through Spain’s FROB bank rescue fund, and will add to Spain’s debt, which was 68.5 percent of gross domestic product last year. Should Spain request the maximum amount, it would add about 10 percentage points to that number, and interest paid on the loans will affect the deficit, which is the euro-area’s third-largest at 8.9 percent of GDP.
Rajoy called a news conference for 12:00 in Madrid today. The European aid for Spain’s banking industry will carry an interest rate of about 3 percent, El Pais reported today, citing people familiar with Spain’s negotiations with its European partners whom the newspaper didn’t identify by name.

Yesterday’s move means Spain has a firewall in case the Greek election on June 17 unleashes a fresh round of market turmoil. The yield on Spain’s benchmark 10-year yield bond jumped after the government announced the nationalization of Bankia Group last month, rising close to the euro-era high of 6.78 percent on May 30. The yield has since slipped amid optimism that Rajoy would seek a bailout and was at 6.17 percent on June 8.

European officials have failed to control a debt crisis that started in Greece at the end of 2009 and has now claimed the euro region’s fourth-largest economy. The bailout adds to the 386 billion euros ($480 billion) in pledges to Greece, Ireland and Portugal that European governments and the International Monetary Fund have made since 2010.