EUROPE IS on the verge of bailing out a fourth member of the single currency, as expectation intensifies that Spain will soon seek aid to rescue its crippled banks.
The banks incurred huge losses in a property crash similar to that in Ireland, and the Spanish government has neither the money nor the borrowing power to prop them up on its own.
Euro zone finance ministers are on standby for an emergency teleconference this afternoon, following indications from Madrid that an application for a bailout may be imminent.
Spain has made several attempts to settle its banking problem but loan losses were badly underestimated in each previous plan.
Germany has already ruled out the provision of direct aid to the Spanish banks from the permanent European Stability Mechanism fund.
Spain pursued that notion in recent weeks in the hope the money would not go on to its national debt. This led to anticipation in Government circles that Ireland might eventually receive similar terms.
“It’s awaited that Spain formulates an aid request, exclusively directed at the recapitalisation of banks,” said Vitor Constâncio, vice-president of the European Central Bank.
The development, in the third year of the debt crisis, follows EU-International Monetary Fund rescue programmes for Ireland, Greece and Portugal. Cyprus may also require a bailout this summer to deal with losses in its banking system.
The likely request from Spain comes ahead of the general election in Greece tomorrow week, a poll that could result in that country leaving the euro.
Some officials working on the Spanish rescue plan said there was concern to provide certainty over its financial position in the event that the Greek election prompted a sudden outburst of turmoil on markets.
A source close to the euro group of ministers said last night that the likelihood of a meeting today was “more than 90 per cent” but stressed that there would be no talks if Spain did not seek aid.
“The issue is that the euro group will have a phone conference if Spain at least signals a requirement for a programme,” the source said.
It is understood that the rescue package will involve about €40 billion in loans for the banks, considerably less than the €100 billion mooted in some quarters.
Such a package would be well within the capacity of the temporary European Financial Stability Facility fund, but that assumes Spain would be able to retain access to private debt markets for day-to-day purposes. This is crucial as the European authorities fear a full-blown bailout would overwhelm the EFSF, leading to knock-on pressure on Italy.
Citing the relatively small scale of the rescue, the euro group source said the IMF was unlikely to be involved this time.
If a request is received, the ministers will direct the European Commission, the ECB and the European Banking Authority to send inspectors to Madrid to negotiate the deal.
Most of policy conditionality will be directed at Spain’s banks. This means the Spanish government will not be subjected to the same kind of intrusive external scrutiny on all elements of its expenditure that accompanied the Irish programme.
Officials expect that the application process will be triggered by Spain’s centre-right premier Mariano Rajoy, who took office seven months ago.
Intensive preparations for a loan plan for Spain came in spite of official denials from Madrid and Brussels that any such work was under way. After plans for the ministers’ meeting were revealed yesterday, the Spanish government circulated the finance ministries all euro zone countries with a note emphasising no aid application had been made.
