Spain is expected to ask Europe for help at the weekend with recapitalizing its stricken banks, EU and German sources said on Friday, becoming the fourth country to seek assistance since the eurozone's debt crisis began.
Five officials in Brussels and Berlin said finance ministers of the single currency area would hold a conference call on Saturday morning to discuss a Spanish request for aid, although no figure on the assistance has yet been set.
The Eurogroup will issue a statement after the call, which is scheduled to take place before midday European time, the sources said.
"The announcement is expected for Saturday afternoon," one of the EU officials said.
The dramatic move comes after Fitch Ratings cut Madrid's sovereign credit rating by three notches to BBB from A on Thursday, highlighting the Spanish banking sector's exposure to bad property loans and to contagion from Greece's debt crisis.
"The government of Spain has realized the seriousness of their problem," a senior German official said.
He added that an agreement had to be reached before a Greek general election on June 17 which could cause market panic and increase the possibility of Athens leaving the eurozone if parties opposed to the terms of an EU/IMF bailout win.
The EU and German sources spoke on condition of anonymity due to the sensitivity of the matter.
A spokesman for the European Commission said Spain had made no request for aid and would not confirm that a conference call was planned. But added that if Spain did make a request, the eurozone had instruments ready to provide help.
"If such a request were to be made, the instruments are there, ready to be used, in agreement with the guidelines agreed in the past, in 2011," Amadeu Altafaj told reporters.
"We are not at that point."
In Madrid, where the Spanish cabinet was holding its weekly meeting, a government spokeswoman said she was not aware of any pending announcement on a bank rescue. She recalled that Prime Minister Mariano Rajoy said on Thursday he would await the outcome of two external audits later this month before talking with Europe about how to recapitalize troubled lenders.
Spain is expected to request aid from the eurozone's 440 billion euro bailout mechanism, known as the European Financial Stability Facility.
The amount depends on the results of audits being conducted by the International Monetary Fund and independent assessors.
Financial industry sources told Reuters on Thursday that a report by the IMF, to be handed to Spain on Friday and expected to be made public on Monday, had estimated Spanish banks' capital needs at a minimum of 40 billion euros ($50.25 billion).
The eurozone has been under strong pressure from the United States, China, Canada and other major partners to take swift, decisive action to prevent the debt crisis spreading and causing greater damage to the world economy.
Fitch said the cost to the Spanish state of recapitalizing banks stricken by the bursting of a real estate bubble, recession and mass unemployment could be between 60-100 billion euros ($75-$125 billion) — or 6 to 9 percent of Spain's gross domestic product. The higher figure would be in a stress scenario equivalent to Ireland's bank crash.
The IMF report is expected to provide a range of figures, with 40 billion euros the minimum requirement, rising to around 90 billion euros for a fuller recapitalization, officials said.
A separate independent audit of the banking sector, commissioned from consultants Oliver Wyman and Roland Berger, which the government had flagged as crucial, is due on June 21.
European shares and the euro fell amid mounting concern over Spain following the Fitch downgrade. Spanish bond yields rose after the steep credit rating cut.
While Spain would join Greece, Ireland and Portugal in receiving a European financial rescue, officials said the aid would be focused only on its banking sector, without taking the Spanish state out of credit markets.
That would be crucial to avoid overstraining the eurozone's rescue funds, which would struggle to cover Spanish government borrowing needs for the next three years plus possible additional assistance for Portugal and Ireland.
"I think they're trying to get a lighter support package, where the money is headed to the banks and not for financing the fiscal deficit," said Vincent Chaigneau, head of rates strategy at Societe Generale. "But you need to know the details, the size of the program and who participates."
If funds are paid from the EFSF to Spain, it remains unclear whether they will go directly to the Spanish state or to the government's bank assistance fund known as the FROB. Either way, analysts say the aid will accrue to Spain's budget deficit.
The sudden escalation of the Spanish banking crisis, dramatized by last month's hasty nationalization of troubled lender Bankia, has contributed to raising Italy's borrowing costs towards danger levels.
The deputy governor of the Bank of Spain told parliamentarians on Thursday that 9 billion euros would also be needed to cover additional losses at nationalized banks CatalunyaCaixa and NovaGalicia, according to one source.
Treasury Minister Cristobal Montoro caused consternation on Tuesday when he said Spain was effectively being shut out of capital markets by spiraling borrowing costs. Madrid managed to sell 2.1 billion euros in bonds on Thursday at higher yields, showing it could still access credit markets.
The aim of a European bank rescue package would be to relieve pressure on the state and enable it to keep borrowing on the markets.
A "bailout lite" would also help salve Spanish pride. Spain is the world's 12th largest economy and No. 4 in the eurozone. EU and German officials have cited prickly national pride as a barrier to requesting a full assistance program.
Any political conditions would be light, related to the banks and would probably not add to the austerity measures and structural economic reforms which Rajoy's government has already put in place, EU and German sources said.
The European Commission and EU paymaster Germany both agreed in principle last week that Spain should be given an extra year to bring its budget deficit down below the EU limit of 3 percent of gross domestic product because of a deep recession.
German Chancellor Angela Merkel said on Thursday that Europe was ready to act to ensure the stability of the eurozone.
"It is important to stress again that we have created the instruments for support in the eurozone and that Germany is ready to use these instruments whenever it may prove necessary," she said, referring to the eurozone's temporary bailout fund, the EFSF, and to its permanent successor, the ESM.
It was not immediately clear which of the funds would be used for the Spanish package. The ESM's rules are more flexible and do not require unanimous agreement by member states, avoiding the risk of political obstacles in a small creditor country. But the permanent fund is only expected to enter into force in mid-July, once ratification is completed.
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