Spain pleads ignorance as markets speculate on bailout

Spanish austerity protests earlier this year in Madrid Financial markets speculated Friday on a vast, European bailout for Spain's distressed banks as soon as this weekend, even as Madrid denied knowledge of the plan. If the gathering signs of intervention prove correct, it would mean the Eurozone debt crisis has defied desperate attempts to contain the contagion to Greece, Ireland and Portugal.
It would also take the two-year emergency to a higher level: Spain's economy is the fourth-largest in the 17-nation Eurozone and is more than twice as those of Greece, Ireland and Portugal combined.
"It seems it will be this weekend. That is what the market is discounting, that they will ask for it this weekend," said David Navarro, manager of variable yield securities at brokerage Inversis.
"It seems we have the shape of the rescue already defined; it would be through the European Financial Stability Facility (EFSF)," Navarro said.
The EFSF, a bailout fund set up by the European Union in 2010, would issue bonds and deliver them to Spain's state-backed bank restructuring vehicle, the FROB, the trader said.
The FROB could then inject the bonds into troubled banks, which could sell them to raise capital, he said.
"This financing could be very good for the banks," Navarro said.
A Spanish economy ministry spokeswoman, however, denied knowledge of any weekend conference call among Eurogroup policymakers to discuss a Spanish banking bailout request.
"I am not aware of such a conference," the spokeswoman said.
She declined to make any comment about a possible rescue.
"The head of the government clearly said yesterday that we are not going to feed comments," the spokeswoman said.
Jean-Claude Juncker, the head of the Eurogroup of finance ministers in the single currency area, stressed Thursday that a rescue was on hand if needed although Spain had not yet made the request.
He declined to discuss figures.
"We are in a real stress moment, going through crucial weeks both for the EU and the single currency," Juncker said at a conference. "These are crucial days and weeks.
A rescue might soothe investors by resolving many questions over a banking sector crippled by its massive exposure to the property market, which collapsed in 2008.
Spain's leading stock market index, the IBEX-35, slumped in early trade but by early afternoon had shot up 0.73 percent to 6,475.00 points.
On the secondary bond markets, the borrowing rate on benchmark 10 year government bonds rose to 6.194 percent from 6.150 at the previous close.
Any banking rescue would not address other broader problems for the economy such as growing sovereign debt, which was subjected to a savage downgrade by Fitch Rating.
Fitch slashed Spain's rating by three notches Thursday, citing ballooning estimates of the cost of a banking crisis, mushrooming debt and a deepening recession.
The long-term rating was chopped to BBB from A and left with a negative outlook, said Fitch.
Fitch said Spanish banks may need 60 billion Euros ($75 billion) and as much as 100 billion Euros in a worse case -- more than double its earlier 30-billion-Euro estimate.
In downgrading the outlook for Spain's job-scarred economy, Fitch warned that it no longer expected the country to emerge in 2013 from a recession in which 24.4 percent of the workforce is out of a job.
Spain raised 2.07 billion Euros in a bond auction Thursday but had to pay a high price, with the 10-year bonds fetching more than 6.0 percent -- a rate widely regarded as unsustainable over the longer term.
"The much reduced financing flexibility of the Spanish government is constraining its ability to intervene decisively in the restructuring of the banking sector and has increased the likelihood of external financial support," Fitch said.
Spanish authorities have given themselves two weeks to take a decision on how to recapitalise their struggling banks.