Spain formally requests banking rescue

MADRID, Spain — Spain formally requested a banking rescue of up to 100 billion euros ($125 billion) on Monday, kicking off a pivotal week in the battle for the eurozone’s future.

The plea to Spain’s eurozone partners provided no exact figure for the aid to be delivered to its banks, which are hobbled by huge, reckless loans that turned sour after a property bubble imploded in 2008.

Though a formality, it came at a key moment in the eurozone crisis after debt markets sent Spanish and Italian borrowing rates spiralling and raised concerns for the future of the currency union itself.

A full-blown bailout for Spain, the fourth-largest economy in the eurozone, would dwarf the rescues of Ireland, Greece and Portugal and strain the resources of the bloc to the limit.

“Whether Spain will also need full-fledged financial support beyond the bank programme will depend on its ability to retain market access,” said Antonio Garcia Pascual, analyst at Barclays Research.

“This in turn depends on both Spain’s policy commitments and, to a greater extent, on the speed with which Europe’s decisions evolve towards greater financial and fiscal integration in the coming days and weeks.”

European Union leaders prepared for a two-day summit from Thursday, when they will consider deepening economic and monetary union in the 17-nation eurozone.

Prime Minister Mariano Rajoy urged the summit to set a schedule to gradually advance towards integration.

“The political message must be forceful and the integration timetable clear so as to restore confidence in the stability of the euro,” he said, renewing his call for the creation of a eurozone budget authority.

French President Francois Hollande met in Paris with European Central Bank chief Mario Draghi for nearly an hour to discuss the summit but neither of them made any comments after the talks.

As the ripples of the crisis spread, a European diplomatic source said Cyprus would ask for financial help “within hours” to prop up the island’s banking system.

European leaders also face demands from Greece’s new three-party coalition government for new terms on its bailout, including a two-year deadline extension on reforms.

But German Chancellor Angela Merkel’s spokesman Steffen Seibert warned that no decision would be taken until an international team of auditors had assessed the state of Greece’s economy.

Auditors from the European Union, IMF and European Central Bank postponed a visit to Greece originally due on Monday.

Prime Minister Antonis Samaras was released from hospital Monday, two days, after surgery for a detatched retina and incoming Finance Minister Vassilis Rapanos is in hospital with stomach pain.

Spain’s banking distress will be the focus of a meeting of eurozone finance and economy ministers, who make up the Eurogroup, on July 9.

In a letter to Eurogroup head Jean-Claude Juncker, Economy Minister Luis de Guindos said Spain would seek to reach a draft loan agreement in time for the gathering.

There has been no decision on the loan amount, though Eurogroup ministers have offered up to 100 billion euros, and consultants hired by Madrid estimated that the banks need up to 62 billion euros in capital.

“If we have a long repayment schedule and a low interest rate, the deal would be much more favourable,” Spanish Foreign Minister Jose Manuel Garcia-Margallo told reporters in Luxembourg.

Fernando Jimenez Latorre, secretary of state for the economy, told a conference in the northern city of Santander that Madrid would prefer the loan not be awarded senior status, which would give it preference over other investors in case of a default.

The prospect of ordinary bond investors being pushed to the back of the queue for repayment in the event of default has already spooked the debt markets, analysts say.

Spain, with support from the IMF, is also arguing strongly in favour of eurozone powers lending money directly to troubled banks, thus avoiding an increase ni Madrid’s sovereign debt burden.

If Spain took out the full 100 billion euros, its public debt would grow by about 10 percentage points to reach 90 percent of economic output by the end of this year, analysts say.

“The question is still open over whether the help will go directly to the banks or through the state,” Margallo said.