Is a bailout of Spanish banks now imminent?

At the beginning of April, we published a briefing predicting that Spanish banks were heading for a eurozone bailout - hoping that we wouldn't be right. Well, alas, it looks like we were. It's been another frantic week for the eurozone, with Spain taking centre stage amid reports that a request for a bailout to help deal with its troubled banking sector might actually be a matter of hours away. Here is an overview of where we are at.

When?

• EU and German sources told Reuters this morning that Spain is expected to make a formal request for a bailout over the weekend, possibly as early as tomorrow afternoon;

• Another EU source told La Stampa's Brussels correspondent Marco Zatterin, "We need to intervene before the Greek vote on 17 June." The message here is clear: if the second Greek elections fail to deliver a stable, pro-bailout government, the contagion to Spain could be almost immediate;
   
• Quite significantly, the Spanish government has been slower than on other occasions in denying the reports. A spokesman initially just said, "The government doesn't comment on speculations". A couple of hours later, Spanish Deputy Budget Minister Marta Fernández Currás said it's "false" that Spain is going to ask for a bailout this weekend;
   
• As flagged up on Twitter by the Telegraph's man in Brussels, Bruno Waterfield, an EU source has called the Spanish government "incoherent" in light of the latest remarks;

• In a press conference early this afternoon, Spanish Deputy Prime Minister Soraya Sáenz de Santamaría has also denied that eurozone finance ministers are to hold a conference call tomorrow - as suggested by the sources quoted by Reuters. The Deputy Prime Minister insisted that the government will wait until after the publication of the IMF report on the Spanish banking sector (due on Monday) and the results of the two independent audits of the real estate assets held by Spanish banks (due on 21 June at latest) before making a decision on whether to ask for financial assistance.   

How much?

• Media reports seem to be converging on the estimates the IMF is due to publish on Monday. It looks like the IMF will put the recapitalisation needs of the Spanish banking sector at €27 billion in a basic scenario and up to €37 billion in an adverse scenario;

• However, sources who have seen the draft report have said that the IMF will recommend a fresh capital injection of at least €40 billion - with the additional money to be used as a buffer against potential short-term downturns, especially after the Greek elections (see above);

• All kind of numbers have been floating around during the week, from the €80-100 billion mentioned by Spanish MEP Antonio López-Istúriz, who also happens to be the Secretary General of the European People's Party (EPP), to the €60-100 billion estimated by credit rating agency Fitch. At the end of the day, Santander boss Emilio Botín, the first to mention the €40 billion figure while he was accompanying the King of Spain on a visit to Brazil last weekend, might have got it right.

How?

• At the moment, the eurozone bailout funds are not allowed to lend money directly to banks. This is possibly the main reason why the Spanish government has not tapped the EFSF yet: saving Spain, the eurozone's fourth-biggest economy, from the 'humiliation' of a fully-fledged bailout with strict conditions attached;

• Germany is reportedly considering a 'face-saving' compromise, which would see the bailout money going directly into Spain's national bank restructuring fund (FROB). A senior German official explained that, under this plan, "conditionality would be focused mainly on the banks, because Spain has already tackled the other reforms."

• In theory, this arrangement would not break EFSF rules - it would be money going to the Spanish government first, and then to the banks. Most importantly for Spain, it would also mean that the country would be imposed softer conditions than those attached to the Greek, Irish and Portuguese bailouts.   

Millions of Spaniards are bracing themselves for what could be a decisive weekend for the future of their country in the eurozone. If a request is made for external assistance, even a win for La Roja against Italy on Sunday evening may not be enough to soothe their fears.