Friday, June 8, 2012

Spanish banks need $46 billion, IMF says in audit

The International Monetary Fund said late Friday that Spain’s banks would need to raise at least 37 billion euros, or about $46 billion, in additional capital to guard against further economic deterioration in the country. That number will guide European policy makers as they seek to stabilize the Spanish financial system and prevent contagion to the rest of the euro zone.

The I.M.F. released its banking audit as Spain contemplates making a formal bailout request to Europe to help recapitalize its fragile banking system.

Spanish banks are struggling with significant losses on their housing portfolios, and they have been hurt by the country’s broader economic malaise. Last month, the Spanish government seized Bankia, the country’s biggest mortgage lender. And Spain’s borrowing costs have soared to close to record highs.

Spanish officials have said they would not request a bailout until they had reviewed audits by the I.M.F. and two independent consulting firms.

In a statement accompanying the audit, the fund said that the “core” of Spain’s financial sector is “well managed and appears resilient to further shocks.” But the report said that significant vulnerabilities remain, particularly among smaller banks and those with bigger exposure to the Spanish housing sector.

In the adverse scenario used in the stress tests, the Spanish economy would shrink 4.1 percent in 2012 and 1.6 percent in 2013. In that case, Spanish banks in aggregate would need to raise about 37 billion euros in cash to maintain their capital ratios at international standards.

But Spanish banks would likely need to raise far more than that to satisfy skittish international investors. The I.M.F. estimate did not include costs associated with restructuring, or losses on loans. Including such costs, the Spanish banking system would require as much as 100 billion euros, or about $125 billion, according to estimates by private firms.

“Going forward, it will be critical to communicate clearly the strategy for providing a credible backstop for capital shortfalls — a backstop that experience shows it is better to overestimate than underestimate,” Ms. Pazarbasioglu said.

The fund called on Spain to form a plan to recapitalize its banking sector and restructure its ailing banks immediately. It also recommended that Madrid introduce new instruments to resolve faltering financial institutions, and to bolster regulatory oversight.

“In recent years a gradual approach to taking corrective action allowed weak banks to continue to operate to the detriment of financial stability,” the report said. “The processes and the accountability framework for effective enforcement and bank resolution powers therefore need to be improved.”

The I.M.F. report comes as European countries — and leaders around the world — are pushing Spain to resolve its financial crisis. On Friday, President Obama urged European leaders to stabilize their financial sector and end their long-simmering sovereign debt crisis.

“These decisions are fundamentally in the hands of Europe’s leaders, and fortunately, they understand the seriousness of the situation and the urgent need to act,” Mr. Obama said at a news conference. “They’ve got to stabilize their financial system. And part of that is taking clear action as soon as possible to inject capital into weak banks.”

European finance ministers were expected to hold calls to hash out a bailout plan for Spain as soon as Saturday.

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