European sources say Spain expected to request bailout on Saturday

The Spanish government will request the activation of a European rescue plan this weekend in order to recapitalize its banks, Reuters reported on Friday, but the government insisted no decision had yet been taken.

Citing two official EU sources and another source from the German government, Reuters added that a conference call is scheduled for Saturday for the euro-zone economy ministers, to discuss the details of this bailout plan. One of the sources said that Spain will request assistance on Saturday afternoon.

Finance Minister Cristóbal Montoro said Tuesday that Spain had effectively been cut off from the debt markets because of the spike in its risk premium, which closed Friday at 488 basis points.

“The government of Spain has realized the seriousness of their problem,” Reuters quoted a senior German official as saying. The official said an agreement on how to deal with Spain needed to be reached before the Greek general elections on June 17, to avoid market panic.

The government’s response to the report was somewhat confusing. A spokesperson for Prime Minister Mariano Rajoy — who just 10 days ago was denying that there was any need for a bailout — said that the government “does not comment on speculation,” and referred to statements made on Thursday by Rajoy himself. The prime minister said the government planned to wait for the IMF report and those of two independent auditors, which are due within 10 to 15 days, before deciding how to proceed.

Deputy Prime Minister Soraya Sáenz de Santamaría said Friday that “no decisions have been taken,” while the secretary of state for the budget, María Fernández Currás, denied there were plans for a bailout. Spain “does not need to be rescued,” she said.

“At the moment, the government is working with the IMF and the [INDEPENDENT]auditors on the figure the financial sector needs to completely clean it up,” Sáenz de Santamaría said. “The procedures have to be respected before a decision is taken,” she added. “When it knows the figure, the government will make its position known.” She said that “for the moment” no meeting of the Eurogroup was planned for this weekend.

EU commission for economic affairs spokesman Amadeu Altafaj said Spain had not made any request for help, and declined to confirm if a conference call was planned. “If such a request were to be made, the instruments are there, ready to be used, in agreement with the guidelines agreed in the past, in 2011,” he said. “We are not at that point.” Altafaj also said Spain should await the results of the stress tests.

Fitch on Thursday cut Spain’s sovereign ratings from A to BBB, just two notches above junk status. The ratings agency said a clean-up of the Spanish banks could cost between 60 and 90 billion euros, between 6 and 9 percent of GDP. An IMF report due to be made public on Monday is expected to show that the banks’ recapitalization needs amount to about 90 billion euros, of which Spain would have to ask for 40 billion in external aid.

Any bailout is expected to be directed exclusively at the banking sector and would not entail the rigorous economic and fiscal conditions imposed on Greece, Ireland and Portugal. The Spanish Treasury would continue to fund itself in the primary market.

The government wants the European rescue funds to inject money into the bank, but this goes against current rules. The funds could be given to Spain’s state Orderly Bank Restructuring Fund.