Spain says its banks need $76 billion to return to health

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MADRID -- Spain’s ailing banks need $76 billion to return to health after being hammered by the country’s spectacular real estate collapse, independent auditors and the Bank of Spain said Friday.

The long-awaited estimate came after an examination by hundreds of auditors that showed half of the 14 banks under review failing so-called stress tests. The grim result confirmed suspicion about the strength of Spain’s financial sector, but did not prompt Madrid to immediately request outside help, despite a line of credit on offer from its European partners.

Nearly half of the overall sum -- about $32 billion -- was needed by a single financial institution: Bankia, Spain’s largest real-estate lender, whose bankruptcy last spring threatened to drag down the country’s entire financial system. Bankia, the fourth-largest Spanish bank overall, is a conglomerate of seven regional lenders that together have dangerously high exposure to bad real-estate loans.

In July, European leaders signed an agreement to lend Spain up to $129 billion to recapitalize its banks. Madrid said it would wait to see the outcome of independent audits of the banks before determining how much of the bailout fund it would tap.

After the audit results were published Friday, Spanish officials again declined to specify how much aid they would request.

‘With all the nuances, it’s difficult to estimate in the end how much help will be necessary,’ Fernando Jimenez Latorre, secretary of state for the economy, told reporters.

Latorre said the amount could be a third less than that contained in the audit, or about $51 billion. He also left open the possibility that Spanish banks might choose to raise the necessary funds on their own rather than tap public money.

His comments prompted gasps from reporters, who expected Spain to immediately declare how much of the European bailout money it would take. Putting the bank rescue in motion is thought to be a key step toward fortifying the entire Spanish economy against collapse.

Nevertheless, Jean-Claude Juncker, head of the finance ministers’ group in the 17-nation Eurozone, said he was ‘comforted’ by the audit results.

‘The final state aid provided to Spanish banks will be lower than the reported capital shortfall, given measures to be taken by the banks in accordance [with] their recapitalization and restructuring plans,’ Juncker said in a statement.

For months, 400 auditors reviewed transactions in 90% of Spain’s banking sector, said Fernando Restoy, deputy governor of the Bank of Spain. Seven of the 14 banks under review failed stress tests.

The $76-billion estimate is a pre-tax figure, the auditors said. After factoring in tax payments and bank mergers that are part of an overhaul of Spain’s financial sector, the amount necessary to cover the banks’ shortfall is $69 billion.

The first batch of loans is scheduled to be sent to the banks in November after approval by Spanish and European officials.

The audit results were published a day after Spain slashed about $50 billion from its budget for next year. By recapitalizing its banks with European help, and cutting spending at home, Spain hopes to avoid having to ask for a second, larger bailout for the government as a whole.

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-- Lauren Frayer