WASHINGTON Spain needs about 40 billion euros in extra capital injected into several banks to allow them to withstand severe economic conditions, the International Monetary Fund said on Friday.
The IMF said its "stress test" does not include extra capital that it recommends Spain needs as a buffer to cover restructuring costs and loan losses. An IMF official said such a buffer usually would be 1.5 to two times larger to convince markets that Spain has a credible cushion to handle shocks.
In Spain's case, that would bring the size of capital required to stabilize its banking system to as much as 80 billion euros, although the IMF did not specify a figure in its Financial Sector Assessment Program report released on Friday.
Spain is expected to ask the euro zone for help with recapitalizing its banks this weekend, sources in Brussels and Berlin told Reuters on Friday, becoming the fourth country to seek assistance since Europe's debt crisis began.
Spain's deputy prime minister, Soraya Saenz de Santamaria, said the government needed to have at least a preliminary estimate of how much extra capital the banks needed before taking a decision.
Hence the IMF's report was critical in helping shape Spain's request. Fitch ratings agency said the cost could be between 60-100 billion euros.
The IMF said it worked closely with the Spanish central bank in examining the balance sheets of Spain's institutions to come up with the assessment. The country's two largest, international diversified banks - Banco Santander and BBVA - are prudently managed and can sustain profits even in stressed scenario, it said.
"While the core of the system appears resilient, vulnerabilities remain in some segments," it said.
These weaknesses are concentrated in a group of commercials banks that are not diversified internationally and in former small savings banks that have converted to commercial banks, which already have received some support, the IMF said.
In conducting the stress test, the IMF assumed that the Spanish economy would contract by 4.1 percent in 2012 and by 1.6 percent in 2013, unemployment would climb to 26 percent by end 2013 and that real estate values would decline by an additional 24 percent.
It then calculated how much the banks would require to meet the Basel III core capital standards of 7 percent.
"Noting the rapidly evolving situation in Spain and the euro area, Directors urged the authorities to act swiftly and spare no effort to restore confidence in the financial system and to preserve financial stability," the IMF board said in the report.
An IMF official who briefed reporters on the findings said that the additional capital buffers would vary from bank to bank, depending upon specifics. However experience shows in other bank recapitalizations that a significant buffer to regain market confidence is needed.
Ceyla Pazarbasioglu, deputy director of the IMF's Monetary and Capital Markets division, said the IMF welcomed an even more detailed assessment of capital needs that Spain has requested from an outside consultant and which should be ready in July.
"But the extent and persistence of the economic deterioration may imply further bank losses. Full implementation of reforms as well as establishing a credible public backstop are critical for preserving financial stability going forward," she said in a news release.
"Going forward it will be critical to communicate clearly the strategy for providing a credible backstop for capital shortfalls - a backstop that experience shows it is better to overestimate than underestimate," she said.
(Reporting By Stella Dawson; Editing by Leslie Adler and Sandra Maler)