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Auditors: Spain bank bailout could cost up to $78B

By Daniel Woolls

Associated Press

Published: Thursday, June 21 2012 2:18 p.m. MDT

MADRID — Spain's troubled banks could need as much as €62 billion ($78.6 billion) in new capital to protect themselves from economic shocks, according to independent auditors hired by the government to assess the country's struggling financial sector, officials said Thursday.

The Spanish government will use the auditors' report as the basis for their application for a bailout loan from the 17 countries that use the euro.

Announcing the reports' findings, Deputy Bank of Spain Governor Fernando Restoy noted that this worst-case scenario was far below the €100 billion ($126.7 billion) loan offered by eurozone finance ministers two weeks ago.

Spain's banking sector is struggling under toxic loans and assets from the collapse of the country's property market in 2008. Concerns that Spain's economy is so weak that it could not afford the cost of propping up its banks has sent its borrowing costs soaring to levels not seen since it joined the European single currency in 1999. The worry is that Spain could soon find itself unable to finance its debts by itself and join Greece, Ireland and Portugal in seeking a rescue loan for not just the banks but the whole country.

The stakes are huge: Spain is the eurozone's fourth-largest economy and would seriously hit the bloc's finances should it need bailing out. The country is struggling through a recession with a 24.4 percent jobless rate. On top of this, government's main customers at its debt auctions are Spanish banks — the sector now being bailed out. In a sign of how reluctant the markets are to invest in Spain, the country had to pay sharply higher interest rates to raise €2.2 billion ($2.8 billion) in a bond auction Thursday.

The audits of Spain's lenders, carried out by consultancies Roland Berger and Oliver Wyman, covered 14 banking groups that account for 90 percent of the country's financial sector. The country will use the reports' findings to decide how big a bailout loan to ask for.

Restoy and Deputy Economy Minister Fernando Jimenez Latorre declined to outline individual banks' needs.

In the auditors' stress test for the worst-case economic scenario — a fall in gross domestic product of 6.5 percent over the period 2012-2014 — most of the banks were deemed to be in a "comfortable" position, Restoy said.

"We're not talking about the imperative capital necessities of the banks. We're not talking about someone urgently needing such and such an amount of capital to deal with their obligations," said Restoy. "We're talking about the capital that would be needed if we were to see a situation of extreme tension which is very unlikely to come about."

"We should keep in mind we are not talking about how much capital an entity needs to survive. We're talking about how much capital an entity will need to confront a situation of extreme stress," he added.

Economy Minister Luis de Guindos, in Luxembourg with eurozone colleagues to discuss Spain's aid request, said a formal petition would be made within few days. Eurozone finance ministers offered Spain a bailout loan of up to €100 billion on June 9. The terms of the loan — for which Spain, rather than banks, will ultimately be responsible for — still have to be negotiated.

Spanish Prime Minister Mariano Rajoy hailed the audit results during a visit to Brazil as an important move toward restoring international confidence in Spain, currently seen as one of the eurozone's weakest links.

"It's a decisive step in the right direction because it makes an accurate and credible diagnosis that fences in the capital needs in manageable margins and ensures that the financial assistance made available to Spain by our European partners is more than enough to solidly clean up our financial institutions," Rajoy said in Sao Paulo after meeting with business leaders.

A more thorough series of audits by four other companies is scheduled to be completed by the end of July.

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