RBS: Spain will need bailout of at least €300bn to resolve crisis

Tim Wallace
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SPAIN’S growing bad bank debt problem means the government will have to seek a €300bn (£241bn) bailout like Ireland’s and Portugal’s, top economists warned yesterday, as aid offered so far will not be enough to resolve its problems.

Central bank data showed banks’ bad loans rose to 8.72 per cent of their outstanding portfolios in April – the highest level since 1994, and up from 8.37 per cent in March.

Loans that fell into arrears increased €4.7bn on the month to €153bn in April, while deposits dropped 2.5 per cent.

This steady worsening of conditions in the financial sector, combined with a large budget deficit, means the government is increasingly likely to need a bailout far in excess of the €100bn bank recapitalisation on offer from the EU’s bailout funds.

“We think Spanish banks will need to generate €134bn of capital over the next three years, on rising bad loans and increasing regulation,” said RBS’s Alberto Gallo.

“Not all banks will be able to generate enough earnings to cover these needs, and the sovereign will struggle to support them all. Our rates strategists expect Spain to ask for a full European Stability Mechanism bailout and to suffer from more rating downgrades.”

Such a bailout could be upwards of €300bn, Gallo warned, as the state as well as the banks will need help. The proposed €100bn recapitalisation simply “keeps the risk in Spain, but moves it to the public sector,” he said. “On top of that, it creates a liability which is senior to existing bonds, making it harder for Spain to borrow on the bond markets.”

Meanwhile the country’s treasury minister Cristobal Montoro demanded the European Central Bank help the government, saying it should “respond firmly, with reliability, to market pressures that are trying to derail the joint euro project.”