Auditors say Spanish banks need up to $78B

MADRID -- Spain's troubled banks could need as much as $78.76 billion in new capital to protect themselves from economic shocks, according to independent auditors hired by the government to assess the country's struggling financial sector.

The Spanish government will use the auditors' report as the basis for their application for a bailout loan from the 17 countries that use the euro.

Announcing the reports' findings Thursday, deputy Bank of Spain governor Fernando Restoy noted that this worst-case scenario was far below the $127.04 billion loan offered by eurozone finance ministers two weeks ago.

Spain's banking sector is struggling under toxic loans and assets from the collapse of the country's property market in 2008. Concerns that Spain's economy is so weak that it could not afford the cost of propping up its banks has sent its borrowing costs soaring to levels not seen since it joined the European single currency in 1999. The worry is that Spain could soon find itself unable to finance its debts by itself and join Greece, Ireland and Portugal in seeking a rescue loan for not just the banks but the whole country.

The stakes are huge: Spain is the eurozone's fourth-largest economy and would seriously hit the bloc's finances should it need bailing out. The country is struggling through a recession with a 24.4 percent jobless rate. On top of this, government's main customers at its debt auctions are Spanish banks -- the sector now being bailed out. In a sign of how reluctant the markets are to invest in Spain, the country had to pay sharply higher interest rates to raise $2.8 billion in a bond auction Thursday.

The audits of Spain's lenders, carried out by consultancies Roland Berger and Oliver Wyman, covered 14 banking groups that account for 90 percent of the sector in Spain. The country will use the reports' findings to decide how big a bailout loan to ask for.

Restoy and deputy economy minister Fernando Jimenez Latorre declined to outline individual banks' needs.

In the auditors' stress test for the worst-case economic scenario -- a fall in gross domestic product of 6.5 percent over the period 2012-2014 -- most of the banks were deemed to be in a "comfortable" position, Restoy said.

"We're not talking about the imperative capital necessities of the banks. We're not talking about someone urgently needing such and such an amount of capital to deal with their obligations," said Restoy. "We're talking about the capital that would be needed if we were to see a situation of extreme tension which is very unlikely to come about."

"We should keep in mind we are not talking about how much capital an entity needs to survive. We're talking about how much capital an entity will need to confront a situation of extreme stress," he added.

Economy Minister Luis de Guindos, in Luxembourg with eurozone colleagues to discuss Spain's aid request, said a formal petition would be made within few days. Eurozone finance ministers offered Spain a bailout loan of up to 100 billion euros June 9. The terms of the loan -- for which Spain, rather than banks, will ultimately be responsible for -- still have to be negotiated.

A more thorough series of audits by four other companies is scheduled to be completed by the end of July.

Oliver Wyman Inc, gave a worst-case range of (euro) 51 billion-(euro) 62 billion in new capital needs while Roland Berger Strategy Consultants GmbH gave a single figure of (euro) 51 billion.

The release of the audits Thursday will probably not eliminate market nervousness about Spain because more thorough audits of the nation's banks are now being conducted and those results are not expected until September, said Mark Miller, an analyst with Capital Economics in London.

"At face value it looks as if there is a reasonable safety margin given that up to (euro) 100 billion is potentially available," he said. "Having said that, the extent of the economic situation in Spain could even deteriorate beyond what is being described as an adverse scenario."

Some investors will likely still be nervous over whether the auditors' reports discovered most if not all of the toxic assets on the balance sheets of Spain's banks, Miller said. And their fears are compounded by concerns that Greece might still end up having to leave the single currency, further destabilizing the eurozone and especially Spain.

The results of the audits are good news for Spain because both companies came up with similar numbers and the overall figures were lower than some estimates of the banking sector's recapitalization needs, said Gayle Allard, an economist with Madrid's IE Business School.

"I think it's a fantastic result because there was talk of needs of (euro) 70 billion to (euro) 80 billion and that the loan could have been for (euro) 100 billion," she said.

Investors could still easily find something to scare them about the results, Allard said, "but I don't think there's any reason to do so."

She added: "The audits have come in better than anyone has expected, there's still some uncertainty, but if both of them are coming to the conclusion of those numbers we've got to be in the ballpark."

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Alan Clendenning and Jorge Sainz contributed to this report.