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Germany comes round to idea of soft bailout for Spanish banks

Terms attached to loan could be restricted to banking system

Spain to decide on bank bailout after audit outcome

Germany is beginning to take on board Spain’s idea that a bailout for the Spanish banking system should not be on the same onerous terms as those imposed on Greece, Ireland and Portugal in exchange for their full-scale rescue programs, German sources said Wednesday.

Although Germany remains opposed to Spain’s demands that banks be allowed to directly the tap the European Financial Stability Fund (EFSF) and its permanent successor, the European Stability Mechanism (ESM), which comes into effect at the start of this month, Berlin is ready to consider a compromise that would not breach the current regulations governing those funds.

This could consist of Spain’s state Orderly Bank Restructuring Fund (FROB) receiving European bailout funds and distributing them among the individual banks that require recapitalization. This would in practice comply with the restrictions imposed on the EFSF and the ESM that require national governments to apply on the part of its lenders for funding.

Any funds received would be for the exclusive use of Spain’s banks and the conditions imposed could be restricted exclusively to the banking sector.

Spain's FROB could receive European bailout funds and distribute them among the individual banks

Financial daily Cinco Días reported Wednesday that in exchange for assistance to Spain’s banks, Europe will demand that lenders make additional provisions for possible losses deriving from defaults on home mortgages, loans to companies and consumer finance. Spain would avoid the rigors imposed on the three euro-zone bailout recipients since the government of Prime Minister Mariano Rajoy has already embarked on draconian belt-tightening to rein in the budget deficit and has introduced structural reforms such as those imposed on Greece and Portugal.

The official response of the German government is that the outcome of the audits being conducted by independent appraisers should form the basis to decide how to proceed with Spain.

German Finance Ministry spokesman Martin Kotthaus said it was important to “avoid more speculation on what Spain should or should not do.”

Earlier Wednesday, Economy Minister Luis de Guindos also said Spain would wait to know the outcome of independent audits being carried out on its financial sector before deciding on asking for a bailout to recapitalize them,

We didn’t discuss a bailout for Spain’s banks at all today"

Finance Minister Cristóbal Montoro acknowledged on Tuesday that the spike in Spain’s risk premium had made it too expensive for the government to tap the debt markets to fund a clean-up of the banks.

“We didn’t discuss a bailout for Spain’s banks at all today [Wednesday],” De Guindos said after meeting with European Parliament lawmakers in a closed-door session.

De Guindos said the government also wants to wait for an IMF report on the sector, which is due to be released next Monday, before deciding how to proceed. The minister insisted that the problems of the Spanish banks are limited in scope.

Concerns about the sector snowballed after nationalized lender Bankia and its parent Banco Financiero y de Ahorro (BFA) asked the government for an additional 19 billion euros to clean up their balance sheets, which have been contaminated by the ailing real estate sector.

Banco Santander Chairman Emilio Botín earlier this week estimated the recapitalization needs of Bankia/BFA, and three other banks that have been nationalized, at around 40 billion euros.

De Guindos said the government expects to receive the results of the audits being carried out by Roland Berger and Oliver Wyman within 10 to 15 days. “Most likely they will be similar to those of the IMF,” he said. “Thereafter, the Spanish government will take the decisions it needs to take with regard to the recapitalization of the banks.”

European Central Bank President Mario Draghi said Wednesday it was up to Spain to decide on a bailout but insisted that any rescue package should be based on a “realistic” valuation of the situation of the country’s lenders.

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