Fitch cut Spain’s credit rating by three notches late Thursday, leaving it two levels above junk, and Friday morning word circulated that the country would ask for a bailout on Saturday. Meanwhile, investors who had been elated over China’s rate cut on Thursday began to fear that the action presaged a host of bad news to come over the weekend.
Reuters reported Thursday that Fitch took the action on Spain and added a negative outlook, saying that the country’s banks would require approximately 60 billion euros ($75 billion) to recapitalize—with the total to go possibly as high as 100 billion euros if the situation escalated.
In a statement, Fitch said, “The negative outlook primarily reflects the risks associated with a further worsening of the eurozone crisis, notably contagion from the ongoing Greek crisis.”
The country’s troubles were reinforced with the determination in an International Monetary Fund (IMF) report, to be published on Monday, that at least 40 billion euros would be required to cover the banks’ capital shortfall. The total needed to resolve the sector’s problems is about 90 billion euros, the report says, adding that healthy banks should cover much of the larger total.
An unnamed source discussing the contents of the report told Reuters, “The capital shortfall for the Spanish banks will be around 40 billion euros after taking into account the capacity from some of the entities to cover expected losses with their own resources.”
European Union and German sources were cited as the origin of the news that Spain would at last seek a bailout. According to two senior E.U. officials, a conference call would be held Saturday among finance ministers of the 17-member eurozone to discuss the situation, and the Eurogroup would issue a statement at the conclusion of the meeting. No monetary amount had yet been determined, they said, although one was quoted saying, “The announcement is expected for Saturday afternoon.” Later reports cited five officials as being aware of the planned call.
A senior German official said in the report, “The government of Spain has realized the seriousness of their problem,” adding that the group had to reach an agreement prior to the next Greek elections on June 17.
However, the sources also said that it was unlikely that any additional conditions set for Spain would be tough, and that additions to austerity measures and economic reforms already mandated would likely not be made.
Two unnamed E.U. officials said that a final total for the cost of recapitalizing the country’s banks was still in flux. “You’ve got bad property loans that still haven’t flowed through the system, and you have a recession. All the banks’ balance sheets are going to be under increased pressure in the months ahead as a result,” one was quoted saying.
He added, “When it comes to Spain, there would appear to be two ways to go: a minimalist approach in which only the bare minimum of banks are recapitalized, and a maximalist approach where you try to get ahead of the bad loans in the pipeline and recapitalize all the banks that need it.”
Just prior to the downgrade on Thursday, Prime Minister Mariano Rajoy of Spain said in a Bloomberg report that he was discussing with E.U. colleagues how best to resolve the situation, and would wait till he received the results from consultants Roland Berger and Oliver Wyman on their evalution of the banks’ capital needs. The two are set to deliver reports on the state of the banks in the second half of June.
“After that I will give my figure and the government will say what the financial system needs to be recapitalized,” he was quoted saying during a Madrid news conference with the Dutch premier, Mark Rutte. “I’ve been talking to my European Union colleagues and to Prime Minister Rutte to take a decision on this matter.”