Photo: Spanish Seek Bailout
The Spanish stock market rallied Monday on news that the European Union will lend Madrid up to 100 billion euros ($125.2 billion) to shore up the Iberian nation’s troubled financial sector, but the gains evaporated during the course of the day amid continuing uncertainty about the size of bank losses.
Prime Minister Mariano Rajoy said Sunday that his government won’t decide on how big a loan to request until officials receive reports from the two independent consultants Spain commissioned to evaluate the condition of the banks.
After surging 6 percent in reaction to the EU agreement to aid Spanish banks, the Madrid stock exchange’s key IBEX-35 index was down 0.54 percent by the end of trading Monday.
Analysts attributed the reversal to concerns about the eventual size of the EU loan and its possible impact on Spain’s overall level of debt.
A similar dynamic played out in the sovereign debt markets, where Spain’s debt-risk premium, the extra return investors demand on Spanish government bonds compared with safe-haven German debt, dipped to 467 basis points before rebounding to 520 points.
Spanish banks will need about 60 billion euros, rating agency Fitch said Monday, while the International Monetary Fund said over the weekend that the figure will be in the range of 40-60 billion euros ($50-75 billion).
The European Commission issued a statement Monday insisting that the 100 billion euros available to Spain is sufficient for even the “most adverse scenarios” and includes a “safety margin.”
The funds are to be paid out of the European Financial Stability Facility and the European Stability Mechanism,
The EU loan will not only “not undermine the current conditions of the public debt, but reinforces solvency,” the Spanish Economy Ministry said Monday, adding that Madrid will continue implementing its program of fiscal consolidation and structural reform.
Spain’s banks have been hard hit by the collapse of the country’s 1995-2007 real estate boom, which has left them saddled with toxic property assets.
Recently nationalized BFA-Bankia - the country’s No. 4 financial institution - is seeking what would be the largest bank bailout in Spanish history after saying on May 25 it needs another 19 billion euros ($23.5 billion) to boost loss provisions.
Fitch announced Monday that it lowered its ratings for Spain’s two largest banks, Grupo Santander and BBVA, by two steps to BBB+.
The 2008 global financial meltdown came as Spain was struggling with the bursting of the property bubble. The ensuing slump has led to numerous business failures and pushed the country’s jobless rate above 24 percent.
Nearly half of Spaniards under 25 are jobless and tens of thousands of families have been evicted from their homes after falling behind on their mortgages.