International institutions will oversee an audit of Spain's banks aimed at reassuring investors that bailout costs will not spiral as the prospect of new Spanish borrowing threatens to further inflame the euro zone crisis. Spain's weak banks and overspending regions are central to the European debt crisis as many investors believe the government will only be able to support them by seeking international aid.
Spain announced a bailout of at least 9 billion euros ($11 billion) and full state take-over for troubled lender Bankia on Wednesday. Meanwhile, officials debated how to back regions that must refinance 36 billion euros this year. A government source said the European Central Bank and International Monetary Fund would oversee an external audit aimed at easing concerns over the health of the banking sector. The source said full details were yet to be decided.
"You have to include them in a way because there is a significant amount of distrust placed by investors on figures provided by the Bank of Spain and the Treasury," Citi economist Guillaume Menuet said. "It's a bit of a double-edged sword, though, because if the figures turn out to be too optimistic it hurts their credibility."
Four stages of banking reforms have failed to convince investors that the financial sector has fully accounted for losses from a 10-year property boom that burst in 2007-2008. The aim of the external audits, due to be completed by mid-June, is to put a definitive number on how much the government might have to spend to shore up banks after forcing them to recognise 137 billion euros in losses.
The government named consultancies Oliver Wyman and Roland Berger to audit the banks from the top down and look at how they would weather a prolonged recession. Three or four other firms will examine bank books and real estate holdings from the bottom up.
Premiums on Spanish debt, as measured by the spread between Spanish and German benchmark bonds, have jumped to euro era highs in the last week after the government stepped in to rescue Bankia, which holds some 10 percent of retail deposits. The risk premium moved up to more than 492 basis points on Thursday before falling back to about 480. Apart from bailed out Greece, Portugal and Ireland, Spain has underperformed all euro zone governments in debt markets this year as the prospect of new borrowing has risen.
"The risk is quite high that Spain will need outside help, at least on the recapitalisation side," said ING rate strategist Alessandro Giansanti. In a meeting with European leaders on Wednesday night, Prime Minister Mariano Rajoy pushed for rapid European Central Bank intervention - such as bond buying on secondary markets - to bring down Spain's borrowing costs. But he got no firm commitments. Spain has outlined budget savings of some 45 billion euros, including around 18 billion euros from the regions, to cut one of the highest public deficits in the euro zone from 8.9 percent of gross domestic product last year to 5.3 percent this year.
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