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Spain's banks need up to $78 billion, auditors say

June 21, 2012 |  1:28 pm

MADRID -- Spanish banks need as much as $78 billion to survive a worst-case scenario in which home prices fall 60 % from their peak, auditors said Thursday.

Spain's European partners have offered it a loan of as much as $125 billion to rescue its troubled banks, weighed down by unpaid mortgages and construction loans left over from the housing market's collapse.

On June 9, Spanish officials acknowledged they would accept a bailout, but decided to wait for the results of two independent bank audits before announcing how much money they would need to tap.

The two auditors, Oliver Wyman Ltd. and Roland Berger Strategy Consultants, released their findings Thursday. Spanish Economy Minister Luis de Guindos, in Luxembourg for meetings with other Eurozone officials, said Madrid would make a formal bailout request in coming days.

It's unclear whether Spain will use the auditors' exact figure in its bailout request or add to it. De Guindos' meetings with fellow Eurozone finance ministers continue through Friday, when Spanish Prime Minister Mariano Rajoy heads to Rome to meet the leaders of Italy, France and Germany. The bailout figure could be discussed in any of those meetings.

Spain's escalating borrowing costs also would probably be on the agenda. The 6.07% yield on five-year Spanish bonds broke a Eurozone record Thursday for the country at a bond auction in Madrid, but the government still managed to raise $2.8 billion, albeit by paying very high interest rates. Spain wants the European Central Bank or rescue funds to intervene and buy government debt, but Germany has not yet agreed to the idea.

Wyman said Spanish banks would need between $65 billion and $78 billion, and Berger estimated the figure at $65 billion. Those are the funds needed if Spanish home prices fall 60% from their peak, and Spanish gross domestic product falls 6.5%, they said.

Spain's economy is forecast to shrink nearly 2% this year, according to government estimates. Home prices have fallen about 18% so far nationwide since their peak in 2008, with most of that drop on the coasts. But as Spanish banks sell off foreclosed properties at current market values, home prices are expected to fall further.

Announcing the audit results, the deputy governor of Spain's central bank, Fernando Restoy, called the estimates "not unfavorable." He noted they were much lower than the loan amount on offer from Spain's European partners. 

"The problems are limited to a group of institutions for most of which actions from public authorities have already been taken,” the Bank of Spain said in a statement. That's likely a reference to Bankia, the country's fourth-largest bank overall but the largest real estate lender, which was nationalized last month and needs $24 billion of taxpayers' money.


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Photo: Deputy Finance Minister Fernando Jimenez Latorre, left, and Bank of Spain Deputy Gov. Fernando Restoy present the results of audits on Spanish banks that will serve as the basis of a request for aid from European allies. Credit: Chema Moya / European Pressphoto Agency