UK fights euro zone threat with 100 billion pound credit boost

The government and central bank will flood Britain's banking system with more than 100 billion pounds ($155.43 billion), seeking to pump credit through an economy struggling to escape recession under the "black cloud" of the euro zone crisis.

In his annual Mansion House policy speech to London financiers on Thursday, Bank of England Governor Mervyn King said Britain would launch a scheme to provide cheap long-term funding to banks to encourage them to lend to businesses and consumers.

He also said the bank would activate an emergency liquidity tool.

Treasury officials said the government plan could support an estimated 80 billion pounds in new loans, while the central bank's separate scheme will provide monthly 5 billion pound tranches of six-month liquidity to banks.

King said the case for pumping more money into the economy via further purchases of government bonds had increased as the outlook for the economy had worsened, although he again rejected calls for the central bank to buy private assets.

King said the euro zone's woes were leading to a crisis of confidence in Britain which was leading to a self-reinforcing weaker picture of growth.

"The black cloud has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms ahead," he said.

Britain's action comes just before cliffhanger Greek elections this weekend that could determine the fate of the euro zone, as well as a meeting of the leaders of the world's major economies next week to find ways to tackle the currency bloc's crisis and spur the global economy.

British finance minister George Osborne warned of the huge dangers from a collapse of the euro area. He again urged euro zone leaders to fix the crisis and said Britain was taking action to protect its own economy.

"We are not powerless in the face of the euro zone debt storm," Osborne said in his speech at Mansion House. "Together we can deploy new firepower to defend our economy from the crisis on our doorstep."

Britain is still reeling from the 2007-2009 financial crisis that has left many Britons poorer and forced the country to bail out big banks with tens of billions of pounds of taxpayers' money.

The government on Thursday announced a sweeping reform of bank regulations aimed at making financial institutions safer, and avoiding a re-run of the crisis which has pushed Britain into recession twice in the last four years.

Britain slid back into recession around the turn of this year, piling pressure on Osborne's embattled Conservative-led coalition government to come up with new ways to boost growth.

The government has pinned its fortunes on a tough austerity plan of tax hikes and spending cuts to erase a budget deficit which still comes in at around 8 percent of GDP.

Osborne defended his debt-cutting measures, arguing that they gave the Bank of England the leeway to keep monetary policy loose, and said there was still more the central bank could do.

BoE Governor Mervyn King said the central bank would complement its quantitative easing asset purchase scheme with new steps to encourage bank lending and reduce their funding costs, which have rocketed as a result of the euro zone crisis.

The BoE and finance ministry have designed a new scheme, to be launched in a few weeks, that would offer banks loans with a maturity of possibly 3-4 years at below current market rates.

The loans would be made available on condition that banks increase their lending to businesses and households.

In addition, the central bank will activate its Extended Collateral Term Repo facility, created in December, to provide six-month liquidity to banks against a wide range of collateral.

King said now was the right time to activate the scheme, which is aimed at helping banks through phases of exceptional stress.

King hinted that the central bank may also restart its QE program, which it halted in May having bought 325 billion pounds of British government bonds, and countered accusations that the scheme had lost its effectiveness.

"With signs of a deterioration in the outlook, especially in world markets, the case for a further monetary easing is growing," King said.

Scottish independence: Dilemma over future of Faslane

The Falsane nuclear submarine base on the Clyde could remain under UK control in an independent Scotland, according to a senior defence minister.

Armed forces minister Nick Harvey said the future of Trident would be the biggest issue in negotiations that would follow a vote for Scottish separation.

Mr Harvey told MPs at the Commons Scottish affairs committee: “I would have thought that relocation would be about the least favourite option possible.”

With the SNP set on removing “weapons of mass destruction” from Scottish territory, the Liberal Democrat minister warned the “costs of moving the base would be absolutely immense”.

His Tory colleague, Peter Luff, said relocation would be “a seismic shock” to the UK budget.

But the suggestion Faslane could remain part of the UK was last night dismissed by the SNP, which wants to turn it into a conventional naval base.

Mr Harvey said the most recent upgrade of Faslane was £3.5 billion “in today’s money” but added that this figure would be “dwarfed” by relocation costs.

It was also suggested that removing Trident could take as long as 20 years.

Under questioning from Tory MP David Mowatt, Mr Harvey raised the prospect that the base could remain UK territory. The move would create a military enclave north of the Border, comparable with US-controlled Guantanamo Bay in the Caribbean.

Another parallel is the Baltic port of Kaliningrad, which remained Russian after Lithuania broke away from the old Soviet Union in the 1990s.

Mr Mowatt asked what terms the UK government would insist on if the SNP reversed its policy on Trident and permitted UK submarines to remain on the Clyde.

Mr Harvey said: “I think the critical one would be complete freedom of action, complete control and complete sovereignty over the facility.”

However, both ministers said there were currently no contingency plans being drawn up for Faslane or defence if Scotland votes for independence, because they do not envisage the scenario happening.

They said the Ministry of Defence needed to hear from the SNP about its plans, but there had been no discussions with the Scottish Government.

They also said the MoD didnot have the resources to look at all the options.

On who would meet the cost of dismantling Faslane, Mr Harvey said a “huge negotiation” would be required.

He added: “If the residual UK taxpayer had to pick up that bill, their ability to pick up any other bills would be proportionately diminished.”

Labour MP Iain McKenzie suggested decommissioning would be included in negotiations after a vote for independence, alongside the division of the national debt.

“A compromise would be made as to who pays for what so both sets of taxpayers would end up paying,” he said.

Mr Harvey replied: “That sounds to me like a sensible characterisation of what I think will probably happen.”

But last night the SNP said Faslane would be Scotland’s conventional naval base, with warships, post-independence.

SNP defence spokesman Angus Robertson said: “Faslane has a tremendous future as a conventional naval base in Scotland after independence.

“For decades arrogant Westminster politicians have foisted nuclear submarines on Scotland,” he added.

“There is no reason to decommission Faslane; it will change its use to something altogether more constructive.”

He said there was a lack of conventional capability in Scotland, which he described as a “total disgrace”.

He said: “The advantage of making better decisions in Scotland is that we can prioritise a non-nuclear defence posture and protect jobs in the conventional military.

“This stands in stark contrast to the UK government, which has been running down conventional defence in Scotland.

“Majority Scottish opinion, our churches, the STUC and civic society all oppose Trident – and the Scottish Parliament has voted against its replacement – yet the UK government wants to use Scottish taxpayers’ money to pay for these weapons of mass destruction, while cutting conventional defence.”

Call to criminalise Australians who support Fiji regime

There has been a call for Australia and New Zealand to make it illegal for its citizens to work overseas in support of undemocratic regimes.

The call comes from prominent Fiji academic, Professor Wadan Narsey, who says several Australians and and New Zealanders are working in prominent positions in the coup installed military government in Fiji.

Professor Narsey told Radio Australia's Pacific Beat program that both countries already criminalise their citizens who travel offshore to engage in paedophilia or terrorist activities, and supporting what he says are illegal governments should be treated the same way.

"I mean I have no problems with those people who are trying to do positive and constructive things, you know, to try and get the country back to a lawful and democratic government," he said.

"But where I have a problem is where quite a few people have gone there and justified illegal things such as the overthrow of a lawful government, or they have taken part in processes which have compromised the judiciary or have compromised the ministerial portfolios."

"If somebody goes and engages in paedophilia or engages in activities which encourage terrorism, such as what happened in September 11, you have laws over here which allows the Australian and New Zealand Governments to prosecute them," said Professor Narsey.

"There is no laws which they can use to discredit this unlawful behaviour abroad, and to me this strikes me as double standards."

He says the lack of legislation available to prosecute such actions is a double standard, made more glaring by the fact that Australia has imposed travel bans on not only those taking part in the coup in Fiji, but their relatives as well.

"That infringes on their basic human rights," he said.

"I mean you are not responsible for your relatives, you are responsible for your own actions."

Professor Narsey says that with huge financial interests at play in areas like PNG and East Timor, there is the very real danger that the assistance of well-trained New Zealanders and Australians can be used to further weaken the fragile political and judicial institutions in these places.

Corruption is still Tunisia's challenge

In the year since the Arab Spring, attention has been riveted on one issue above all others: the place of religious practice in public life. In Tunisia, where the movement began, full-face and body veils, now often worn complete with gloves, are increasingly visible on the streets — an exotic sight for locals and foreigners alike. And the secular opposition seems increasingly strident in its conviction that the Islamist government is driving the country the way of Iran.

But it wasn't religion that set off the Jasmine Revolution; it was acute economic injustice and the pervasive and structured corruption that helped produce it. The fate of Tunisia, and its neighbors, may depend most on whether that lingering problem is addressed.

You can usually tell which buildings in this sparkling, white-and-sky-blue country the family of former dictator Zine el Abidine ben Ali had a stake in; they're eyesores. Last month, a small group of protesters gathered in front of one of them, a squat, mustard-colored hotel complex on a beach in the town of Kilibia.

Kilibia, home to extensive Roman and Punic archaeological sites, also boasts beaches of silky, ash-white sand, which audibly sings underfoot as you walk across it. The seafront is exactly the kind of resource members of the Ben Ali family liked to commandeer for their personal gain.

They had shares in several sprawling hotels here, including the yellow one, built with an Italian investor. Typically for the Tunisian tourism industry, it functioned and still functions as a closed system: Tunisians are not allowed on the beach; the hotel employs no Tunisians except for a few guards, purchases no Tunisian supplies or food — not even any luscious local olive oil. Everything is shipped in from Italy.

Now the hotel is dumping coarse yellow sand across the top half of the beach to cushion tourists' feet from a rock formation.

This may sound like a trivial transgression. But it typifies the arrogation of public resources and financial opportunities for the personal enrichment of regime insiders that sparked last year's uprising.

Under the Ben Ali dictatorship, physical repression, torture and disappearances were fairly uncommon. The regime perpetrated its oppression by means of a diabolically intrusive system of state corruption.

This particularity has prompted Tunisian activists to blaze new paths in human rights doctrine. They are seeking to expand the definition of "gross violations of human rights" to include systematic economic crimes. They want perpetrators to answer for these crimes in a public reckoning, as part of a transitional justice process, like the ones in South Africa or Rwanda that focused on physical abuses.

Tunisia's new Cabinet includes a minister for "governance and anti-corruption." This is an innovation, certainly, but activists worry that his appointment was more show than substance.

A commission established in the weeks after Ben Ali's overthrow, and including public accountants and specialists in the intricacies of administrative or real estate law, examined some 5,000 complaints. The report it released in November exposed a vast system of structured corruption by which the Ben Ali in-laws and their cronies helped themselves to the best of everything: stakes in the most lucrative businesses, exemption from customs dues, choice public land. Government institutions such as tax authorities and the judiciary, even private banks, became instruments of coercion. Recalcitrant chief executives would get slapped with an audit or see their loans dry up or their authorizations revoked.

The commission developed evidence on 400 cases, which it transferred to courts. But according to member Amine Ghali, only a handful have been taken up by a judiciary still largely staffed by Ben Ali-era personnel.

"We're no one's first priority," says Ghali, detailing examples of neglect by the current government. "We have no office equipment or vehicles, no power to subpoena witnesses or to protect them. Members who are government employees don't even get relieved of their regular duties but have to do this work on the side. You get the feeling the government doesn't care if we succeed."

Many fear that the current political elite, including the leadership of the ruling Islamist party, intends to quietly appropriate the old structures and practices for their own benefit. Recently passed provisions of this year's budget include Ben Ali-style shelters for potentially ill-gotten gains, in return for a financial contribution. Taoufik Chamari, of the National Anti-Corruption Network, warns of the "real risk that the same system of corruption will be maintained, legitimized by new beneficiaries."

Corruption is a less photogenic issue than heavily veiled women. Yet when it grows so pervasive as to amount to capture of the state by a structured criminal network, as it did in Tunisia and in Egypt, public outrage can get explosive. Many here predict that if Tunisia does not use this remarkable post-revolutionary moment to impose accountability, then a frustrated people may truly radicalize, turning to militant, puritanical readings of Islam to afford a recourse the post-revolutionary democracy did not.

As the example of the yellow hotel suggests, actions of Westerners — conscious or unconscious — matter. Our support for Arab nations in transition, our behavior as investors and visitors, should break with past habits of contributing to corruption.

Subject of Bank Indonesia bribery case a hero of the people

Eight years after dozens of legislators took bribes to vote for Miranda Goeltom as senior deputy governor of Bank Indonesia, the woman at the center of the saga has been jailed, but the big question remains: who benefited from having her in office?

Twenty-eight legislators have been tried and convicted in the case, along with Nunun Nurbaetie, Miranda’s acquaintance and the woman accused of channeling the Rp 20.8 billion ($2.2 million) in bribes.

Miranda, however, has consistently denied knowing about the bribes, a stance stressed by her lawyer, Dodi Abdul Kadir. “Miranda firmly declares that she knows nothing about the distribution of the traveler’s checks,” he said on Monday.

She never made any promises to the members of House of Representatives Commission IX who voted her into office, and she only found out about the bribes later through media reports, Dodi said.

But testimony presented in Nunun’s trial paints a different picture. Witnesses alleged Miranda asked Nunun to set up a meeting for her with Commission IX legislators prior to the vote.

Nunun did as asked, hosting a meeting at her home in South Jakarta. Miranda continued to have meetings with other legislators, witnesses said.

But the question of who was bankrolling the whole venture remains unanswered. Speculation has long been rife that the money came from people within the banking industry who were seeking to influence central bank policy.

Dodi acknowledged that Miranda often met with senior executives from a host of banks during her time in office, but said these meetings were part of the job.

“There was nothing special about those meetings,” he said. “In fact, she hardly remembers what they spoke about because they were informal gatherings.”

The Financial Transactions Report and Analysis Center (PPATK), the government’s anti-money laundering agency, previously determined the traveler’s checks were purchased from Bank International Indonesia by First Mujur Plantation and Industry, a palm oil firm owned by tycoon Tommy Winata.

A BII executive testified in one of the earlier trials that First Mujur purchased the checks through Bank Artha Graha, another of Winata’s companies, on the day Miranda was elected in June 2004.

A year later, Bank Indonesia approved a merger between Bank Artha Graha and the publicly held Bank Interpac, which meant Winata’s new company, Bank Artha Graha International, qualified for a listing on the Indonesia Stock Exchange (IDX).

But Dodi said there was nothing wrong if parties benefitted from policies that Miranda pushed. “What’s wrong with a policy that benefits a single party if it’s based on prevailing regulations?” he said. “There will always be those who are disadvantaged by policies and those who benefit. That’s normal.”

He added that even as senior deputy governor, Miranda still needed the support of other BI officials to change bank policy.

So who really benefited in the end? “Look at the country’s economic performance indicators,” the lawyer said.

“The rupiah strengthened, inflation went down. Who benefitted the most? The Indonesian people, of course.”

China's crashing the party as police put expats in their sights

It was a Thursday, 11pm, and the parties were getting started at the nightspots popular with expatriates on Yongfu Road, in Shanghai's trendy former French Concession. Then, at upmarket bar The Apartment, the police arrived, about 50 of them. The party stalled. They blocked the exits to the four-storey colonial era building, cut the music and ordered the lights be switched on.

The raid was part of a 100-day crackdown, purportedly on foreigner visa violations, launched weeks earlier in Beijing that has left a bitter taste among many young foreigners here, and raised questions about possible political motives behind it.

A Dutch resident who witnessed the raid on The Apartment said police demanded passports from all patrons and recorded passport and visa numbers.

Those without passports or copies of identity documents or who had invalid visas were detained.

The Dutch patron, an employee of a multinational company in Shanghai who asked not to be named, says he avoided detention with a discreet bribe, the equivalent of about $47.

Others were not so lucky. "I saw at least 12 foreigners in the back of a police van,'' he said. "The door was closed and the van drove away."

Neighbouring nightclubs were also raided that night two weeks ago, but within an hour The Apartment was open again. This weekend it is advertising four nights of parties to celebrate its second anniversary.

Bar owners interviewed by The Sunday Age were reluctant to be identified, not wanting to draw attention to themselves. But one said the incident was unprecedented in his more than a decade in Shanghai's entertainment industry. Business was down on subsequent nights.

Some linked the raid to a viral video of a British man apparently committing a sexual assault on a Chinese woman in Beijing. Within 24 hours of being posted last month, the video had been viewed more than 3 million times on China's equivalent of Twitter, Sina Weibo. It attracted more than 50,000 comments, many of them distinctly anti-foreigner.

"Suddenly the government launches a crackdown on all laowai [foreigners] like we are some sort of plague," said one online post by an expatriate in Shanghai.

The crackdown, which was announced in China's state-controlled media on May 15, officially targets foreigners living or working in China illegally.

Expat unease worsened after a xenophobic online rant by Yang Rui, a prominent TV host on CCTV 9.

Rui lauded the campaign to protect "innocent girls" from "foreign trash", "thugs" and "spies", and described recently expelled al-Jazeera English correspondent Melissa Chan as a "foreign bitch".

Rui received no official reprimand for the post, which was also published on CCTV's website.

The crackdown started in Beijing, prompting a bitter reaction from some foreigners who have lived in the city for years and see it as home.

American media worker Jacob Trent told CNN he was pulled off his bike by police who demanded his papers.

''I have been living here for a decade and yet I still get treated like - and sometimes called - a foreign barbarian,'' Trent said.

British expat David Park told CNN: ''I have noticed a change in how I am treated. It has gone from curiosity to hostility.''

The Shanghai raids were played down in the local media.

The Global Times reported a police denial of any raid and quoted a manager from The Apartment stating the club was merely visited by four officers who asked them to keep the noise down.

But The Sunday Age has established that exclusive Shanghai nightclub and restaurant M1NT, whose founder and CEO Alistair Paton is Australian, was raided two weeks before The Apartment raid. Four foreign staff and four patrons were found without documents, detained and later released once valid papers were provided.

The crackdown is taking place against a backdrop of political uncertainty.

The scandal involving the downfall of Chongqing Communist Party chief Bo Xilai, a slowing economy, rampant corruption, domestic food safety concerns and the widening gulf between rich and poor is causing unease within party ranks and the general populace.

There is a feeling among some foreigners that the visa campaign serves not only to whip up nationalist fervour, but to distract from more pressing problems.

Unlike some other Asian nations, foreign residents in China mostly apply for yearly visa extensions. Many expatriates in Shanghai consider it their home, but live under a cloud of uncertainty.

For this reason, there is reluctance among foreigners to openly discuss sensitive issues. The Australian owner of a successful Shanghai company said: "We run a legitimate business and follow the system, but things can change in an instant here."

Hacking group Anonymous takes on India's internet censorship

Mumbai's Azad Maidan sports ground is often packed with children playing cricket, but the bowlers and batsmen were joined on Saturday by a sea of Guy Fawkes masks.

The costumes are a hallmark of the internet "hacktivist" group Anonymous which organised a series of protests in Indian cities, including Mumbai.

"I'm here for internet freedom. There's restrictions on speaking online. That's why I'm here," says 19-year-old Amisha, a student who was one of around 100 protesters in Mumbai.

Holding banners calling for freedom from censorship, the group were protesting against India's internet laws.

"India is following China and Iran. They don't want the right information to reach people," said 20-year-old student Nishant, whose face was hidden behind a scarf and sunglasses.

"There are some sites they've blocked for information which is relevant to us. Information which is useful to us as citizens of this country," he added.

Speaking to the BBC via their internet chatroom, members of Anonymous India said they were representing the "common man" and were simply ordinary internet users trying to make a point.

Anonymous India organised its Occupy campaign against what it believes is the unfair blocking and banning of file sharing sites by Indian internet service providers (ISPs) such as Reliance Communications and Airtel.

"We are protesting arbitrary, extra-judicial censorship, where not even the government knows - or cares - who controls what," said @anamikanon from Anonymous on the group's chatroom.

Last month a number of Indian ISPs blocked access to file-sharing sites including Vimeo, Pastebin, Piratebay and Dailymotion following a court order which centred on the issue of internet copyright.

A Chennai-based film company, Copyrightlabs, called on big Indian ISPs, including Reliance Communications, MTNL and BSNL, to prevent access to websites which allowed users to illegally watch two of their Bollywood movies, Three and Dhammu.

The court order, known as an Ashok Kumar order, is like a John Doe order in the United States - designed to protect the copyright of music, films and other content.

The blocking of access to file-sharing and torrent websites prompted Anonymous India to hack into more than 15 sites, including the Indian Supreme Court, two political parties and the Indian telecoms providers.

The group carried out a number of "Denial of Service" (DDOS) attacks, which can temporarily suspend connection to a site.

It also claims it was able to enter the servers of Reliance Communications, and in a press conference in May, presented a list of the file sharing sites it alleges the ISP had restricted access to.

Reliance Communications refused to comment on claims they are restricting access to sites, but pointed the BBC to a statement from 26 May, in which the company said it had the "strongest possible IT security to tackle unwarranted intrusions," adding that their servers could not be hacked.

Anonymous says it is not supporting piracy, but that many file-sharing sites are used in a perfectly legitimate way, for example to share photos or software code.

"File sharing is the lifeline of the internet, that's why it came into being", said tomgeorge, also from Anonymous, via the chatroom.

The group is also protesting against Indian government IT regulations that came into effect last year, which force websites to remove objectionable posts within hours of receiving a complaint.

Members of Anonymous say they will continue their actions until restrictions are lifted.

"The government can't stop piracy in a country by just banning sites. This is a country where you have people selling pirated CDs on trains in streets... it is actually too much to expect," says Anon3x3Kalki, another member of the group.

Nuclear talks fail between UN and Iran

The UN nuclear watchdog and Iran failed at talks Friday to unblock a probe into suspected atom bomb research by the Islamic state, a setback dimming any chances for success in higher-level negotiations between Tehran and major powers later this month.

Using unusually pointed language, the International Atomic Energy Agency said no progress had been made in the meeting aimed at sealing a deal on resuming the IAEA’s long-stalled investigation. It described the outcome as “disappointing.”

A few weeks ago, UN nuclear chief Yukiya Amano said he had won assurances from senior Iranian officials in Tehran an agreement would be struck soon.

Herman Nackaerts, the IAEA’s global head of inspections, said after the eight-hour meeting at its headquarters in Vienna no date for further discussions had been set.

The nuclear agency had been pressing Tehran for an accord that would give its inspectors immediate access to the Parchin military complex, where it believes explosives tests relevant for the development of nuclear arms have taken place and suspects Iran is cleaning the site of any incriminating evidence.

The United States, European powers and Israel want to curb Iranian atomic activities they fear are intended to produce nuclear bombs. The Islamic Republic says its nuclear program is meant purely to produce energy for civilian uses.

Six world powers were scrutinizing the IAEA-Iran meeting to judge whether the Iranians were ready to make concessions before a resumption of wider-ranging negotiations with them in Moscow June 18-19 on the decade-old nuclear dispute.

The lack of result may heighten Western suspicions Iran is seeking to drag out the two sets of talks to buy time for continuing uranium enrichment, without backing down in the face of international demands it suspend its sensitive work.

“It should by now be clear to everyone that Iran is not negotiating in good faith,” a senior Western diplomat said.

A European envoy also accredited to the IAEA said, “This is a dismal outcome … Iran is simply wasting time with its evasions and refusal to engage.”

Mark Fitzpatrick, a former senior U.S. State Department official, now a director at the International Institute for Strategic Studies think-tank in London, said, “This situation is reminiscent of the Peanuts cartoon of Charlie Brown repeatedly believing Lucy this time will hold the football for him to kick, with her always snatching it away at the last minute, leaving him to fall flat.”

Ali Asghar Soltanieh, Iran’s IAEA ambassador, said after Friday’s talks work on a “structured approach” document, setting the overall terms for the IAEA investigation, would continue and there would be more meetings.

“This is a very complicated issue,” he said.

Asked about the Iranian envoy he replied, “That is in fact one of the problems. The more you politicize an issue which was purely technical it creates an obstacle and damages the environment.”

And so the debate over baubles that will never be used goes on, while the world that created them crumbles.

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.