Spain awaits bank audit; no immediate bailout

BRUSSELS/MADRID (Reuters) - Spain has no immediate plans to request a European bailout of its banks and is awaiting the results of an independent banking audit due later this month before any further steps are taken, Economy Minister Luis de Guindos said on Wednesday.

Multiple EU sources say, however, that Spain, Germany and European Union policymakers are in intense discussions over how to help Madrid recapitalize its troubled banks after a series of reforms failed to convince on the stability of the country's financial system.

Doubts over Spanish banks' ability to handle losses related to a property crash and two successive recessions have pushed the euro zone's fourth largest economy's borrowing costs to levels that could tip it into an international bailout.

Spain is pushing for changes to European rules to be able to get aid for banks without too many state conditions attached, sources said.

That would spare the government the humiliation of having to ask for a sovereign bailout but it is unclear how much flexibility it will get from Germany which has said the government must request a bailout.

An external audit of Spain's banking system expected before the end of June is likely to reveal additional capital needs of 30 billion to 70 billion euros, economists say. Prior to that, an IMF report into the banking sector is due on June 11.

The government is sure the results from both reports will tally, de Guindos told reporters in Brussels, where he will meet EU Competition Commission Joaquin Almunia later.

"From there, the Spanish government will take the decisions it has to in terms of recapitalizing the institutions," he said.

His colleague, Treasury Minister Cristobal Montoro said on Tuesday that European mechanisms should be used to revive Spanish banks, although the amount needed is not astronomical, breaking with the government's line up to now that it could handle the bill alone.

The risk premium investors demand to hold Spanish 10-year debt rather than the German benchmark reached its highest level since the launch of the euro, at 548 basis points, last week. It has eased to 500 bps since then on hopes that action is imminent.

One option being discussed in some euro zone capitals was for money to be handed to the Spanish bank rescue fund FROB to avoid the government having the humiliation of asking for aid, an EU source said, though the legal position on that was not clear.

THREE DIFFERENT ASSESSMENTS

Three different assessments of Spanish banks are due in the coming days and months. The IMF report will include how much capital the financial system needs to weather a severe economic downturn.

The government has also hired consultancies Oliver Wyman and Roland Berger to carry out audits before the end of June which will assess the capital needs for the system as a whole.

Each consultancy will use Bank of Spain data to run a stress test using the methodology of similar tests carried out in Europe last year by the European Banking Authority, said one banking source.

Five different sources said that in a bid to increase confidence in the result, the two auditors will run their data independently, without consulting each other, and could come up with different final numbers.

Another audit, to be completed by August or September, will be conducted by the 'Big Four' accountants - KPMG, Deloitte, Ernst & Young and Price Waterhouse Coopers.

This will involve an inspection of each bank, two banking sources and one legal source said, valuing assets and how the lenders are complying with the demands of two banking reforms which demand recognition of heavy losses on real estate assets.

It will also assess banks' risk control processes.

CAN THE RULES BE CHANGED?

Spain already meets the conditions to apply for aid that it would use for its banks, under the regulations of the existing European bailout fund, the EFSF.

However, EFSF aid would come with stringent conditions making it politically unsavory for the government which is why Spain is pressing for modifications to the rules of Europe's bigger bailout fund, the ESM, which comes into effect in July, allowing it to give direct aid to banks.

Legal experts disagree over whether that is possible and Berlin remains opposed, although it might consider giving money to the FROB banking fund tantamount to lending to the state.

Questions also remain over whether smaller troubled Spanish banks such as state-intervened CatalunyaCaixa and NovaCaixaGalicia could be rescued, because they are not classified as systemic, one of the provisos for accessing European help.

EU sources said that even if direct aid for the banks can be negotiated, conditions could still be attached and Spain's government would have to ask for it and sign a memorandum of understanding that carries the stigma of a state rescue.

The external auditors are expected to uncover more losses in the financial system under stressed scenarios adding an extra 30-70 billion euros to the 84 billion euros already identified related to real estate losses and potential losses.

Spanish officials are optimistic that the number will be at the lower end of the range and hope it will even surprise markets by being lower than expected.

Prominent Spanish Banker Emilio Botin, Chairman of Santander, the euro zone's biggest bank, said on Monday he expected the figure to be 40 billion euros, though it was not clear whether he was referring to all banks in the system.

Government sources said they do not believe the audit will reveal system-wide losses as deep as the ones recently revealed at Bankia, Spain's fourth-biggest lender which is being nationalized by the government in a rescue estimated at some 23.5 billion euros.

A Spanish business newspaper reported on Wednesday that the government is working on a new banking reform, the third one this year, to make sure banks have enough capital to deal with losses on mortgages as well as on loans to businesses and consumer credit.

(Additional reporting by Sonya Dowsett, Barbara Lewis, Annika Breidthardt, Jan Strupczewski, Luke Baker and Andreas Rinke, editing by Mike Peacock)

snl green bean casserole sweet potato recipes the sound of music celebration church new york auto show 2012 tulsa