MercoPress. South Atlantic News Agency

Spain formally request Euro zone rescue to recapitalize debt-laden banks

Minister Luis de Guindos addressed the letter to Euro-group chairman Juncker

Spain on Monday formally requested Euro zone rescue loans to recapitalise its debt-laden banks as the Euro and shares fell on investor scepticism about this week's EU summit.

Spanish Economy Minister Luis de Guindos asked for up to 100 billion Euros in a letter to Euro-group chairman Jean-Claude Juncker, saying the final amount of financial assistance would be set at a later stage.

He confirmed his intention to sign a Memorandum of Understanding for the package by July 9 and said the amount should be enough to cover all banks' needs, plus an additional security buffer.

The rescue, agreed on June 9, is intended to help Spanish lenders recover from the effects of a burst real estate bubble and a recession, which have piled up bad loans and sinking property portfolios.

Two independent audits last week put the Spanish banks' capital needs in a stressed scenario at up to 62 billion euros, and a full audit will be delivered in September.

In a statement, the commission's top financial and monetary affairs officer Olli Rehn, welcomed the request and pledged “to step up work to get a clean assessment of the sector and its needs.” He said the two audits were “a good starting point.”

Rehn said he was “confident an accord can be reached in a matter of weeks.”

The government ordered the audits carried out by Oliver Wyman Inc. and Roland Berger Strategy Consultants GmbH, as an act of transparency in the hope their results would calm markets. Some analysts said the Spanish economy's outlook is so bad that the assumptions may be conservative.

Four other international auditing firms will now carry out more exhaustive audits of each bank by July 31. Based on these, a round of stress tests will then be held on each entity in September. Banks then seen to be financially unsound will be given 15 days to come up with restructuring plans and, if approved, nine months to fulfil them.

Spain is pushing for the loans to go directly to the banks, rather than have the government be responsible for repayment. While organizations such as the IMF support this procedure, others such as fellow Euro-zone country Germany have ruled it out. Berlin insists on abiding by current regulations under which the money must be given to a government, adding to its debt pile. The Commission also stands by this position.

A working document prepared by top European Union officials calls for the gradual introduction of a banking union, starting with supervisory power for the European Central Bank and developing a deposit guarantee scheme based on pooling national systems, with a levy-funded bank resolution fund.

The Euro zone has set up two rescue funds to try to contain the crisis, the temporary EFSF and the permanent ESM, due to come into force next month, but markets have so far judged that they contain too little money and their governance is too inflexibly to be effective.