Spain’s bank audit to offer launchpad for aid request

(Reuters) – An independent audit on Spanish banks, which along with an austerity budget appears to prepare the way for a government bailout, is likely to show on Friday that troubled lenders need around 60 billion euros ($77 billion) to return to health.

However,

the amount Madrid finally taps from a credit line already agreed with the European Union for recapitalizing banks will be significantly less thanks to a series of other measures, a government source said.

Spain, the euro zone’s fourth largest economy, replaced Greece, Ireland and Portugal earlier this year as the main threat to the survival of the euro currency project.

Battered by a deep recession, mass unemployment, indebted regions and crippled banks after a decade-long boom fuelled by a property bubble ended abruptly in 2007, the country secured the 100-billion-euro European lifeline for the banks in June, and has since then quietly laid the ground for a state bailout.

Both the 2013 budget presented on Thursday and results of the audit of Spain’s 14 main banks by consultancy Oliver Wyman are necessary steps for Madrid to request sovereign aid and trigger a bond-buying program by the European Central Bank.

The results of the banking audit are due in a news conference at the economy ministry at 6 p.m. (1600 GMT).

Economy Minister Luis de Guindos and banking executives said last week that the audit findings would be in line with preliminary estimates of 62 billion euros in capital needs for the banks, published in June.

A government source told Reuters the final figure should be between 55 billion euros and 60 billion euros. However, Spain will end up drawing less than this. “We could see something at around 40 billion euros,” said the source, on condition of anonymity.

This is because some banks are expected to be able to raise capital by themselves. Also toxic assets – such as loans for property projects which are unlikely to be repaid – will be transferred into a “bad bank” and bondholders will have to accept sharp reductions in the value of the debt.

Banking and official sources cautioned that the figures could shift in last minute talks on the parameters of the audit between the banks, the government, international creditors and Oliver Wyman.

Banking sources told Reuters that tax credits would probably not be taken into account, meaning capital needs for state-rescued lender Bankia could increase by 6 billion euros to 25 billion. This does not include an earlier public cash injection of 4.5 billion euros.

The figure would also go up for the three other nationalized bank CatalunyaCaixa, NovaGalicia and Banco de Valencia.

The business daily Cinco Dias reported on Friday that the banks considered as sound in the audit would be allowed the tax credits, but only by accounting for them over a five year period.

Spain is also bracing on Friday for a credit review – due before the end of September – from rating