Spain likely to seek euro zone bail-out

Will Spain finally join Greece, Ireland and Portugal and seek a bail-out from the European Financial Stability Facility (EFSF) and the International Monetary Fund (IMF) for re-capitalising its troubled banks?

That was the big question bothering financial capitals in Europe and the US on Saturday, as Spain was toying with the idea of joining the other three European nations that have sought help from the euro zone's €440 billion bail-out mechanism. A day after the IMF came out with a report suggesting that Spain would need to raise capital buffers by €40 billion, the country was on Saturday widely expected to seek a bail-out.

The zone's 17 finance ministers are expected to discuss the Spanish bail-out plea. ''It is expected that Spain will formulate a request for aid exclusively for bank recapitalisation,'' said Vitor Constancio, vice-president of the European Central Bank. ''There has to be an expression of will to have such a programme for Spanish banks, and one may hope it happens rather swiftly.''

German Chancellor Angela Merkel noted that while she was not pushing any country to opt for a bail-out, it was up to Spain to decide on the matter. ''It's down to the individual countries to turn to us,'' she said. ''That has not happened so far, and therefore we will not exert any pressure.''

Fitch Ratings has already cut Spain's credit rating by three notches to BBB, highlighting the country's banking sector exposure to property loans. The agency warned the cost of re-capitalising Spanish banks following the bursting of a property bubble could add up to nearly nine per cent of the GDP of the world's 12th largest economy and the fourth biggest in the euro zone.

The IMF, in its financial sector assessment programme (FSAP) review of Spain, noted that the country's financial sector was well managed and appeared resilient to further shocks, but important vulnerabilities remained in the system.
 
''The Spanish authorities have recently accelerated financial sector reforms to reduce vulnerabilities in the system,'' said Ceyla Pazarbasioglu, deputy director of the IMF's monetary and capital markets department and head of the team that conducted the FSAP. ''They have taken measures to address some of the most problematic banks and are currently undertaking an independent valuation of all portfolios, which is a welcome step and should help to determine further restructuring needs.''

But the extent and persistence of the economic deterioration may imply further bank losses. ''Full implementation of reforms, as well as establishing a credible public backstop, are critical for preserving financial stability going forward,'' added Pazarbasioglu.