Bottom line: The new stress tests revealed on Friday showed Spanish banking system needs EUR 59.3bn of additional capital, less than the EUR
62bn estimated in June. The Spanish government said the bailout costs may be even less, only about EUR 40bn, as a new state-owned "bad bank" will be created and some banks will raise funds. Still, Spanish government said that due to the bank bailout its budget deficit will increase to ca. 7.4% of GDP this year, above the deficit target of 6.3%. The stress tests results followed the Thursday’s presentation of Spain’s 2013 budget along with additional fiscal measures to boost growth. However, even with the new measures, it is not clear whether Spain will be able to meet its fiscal targets, as GDP growth assumed by the government is rather optimistic. Importantly, the new budget announcements should pave the way for a Spanish request for EFSF/ESM support, necessary to allow ECB bondbuying. With more fiscal tightening the government is hoping to head off any tougher conditions demanded as part of external support (so-called “conditionality”).
The Spanish banking system needs EUR 59.3bn of additional capital, independent stress tests results released Friday by U.S. consultancy Oliver Wyman showed. This means the bailout costs will be less than the EUR 62bn estimated in June. The stress test results will be the basis for calculation of how much the country will need to tap from the EUR 100bn bailout obtained from the EU. Importantly, the Spanish government said it may need less of the EU funds than the stress tests show, only about EUR 40bn. This is because a new state-owned "bad bank", created under the terms of its banking bailout, will reduce capital needs and some banks will also be able to raise funds on their own by selling businesses. Still, in its 2013 budget plan presented to Parliament on Saturday, the Spanish government said that the bank bailout will increase its budget deficit to cca. 7.4% of GDP this year, above the deficit target of 6.3% of GDP. The government said that if the measures to aid banks were excluded, it would meet its fiscal target. Spain had earlier hoped that the burden of the bank bailout could be shifted to the eurozone’s bailout fund, but a statement last week from the finance ministers of Germany, Netherlands and Finland suggested such possibility should not be open to existing bailouts, like Spain's.
The stress tests results followed the Thursday’s presentation of the Spain’s budget for 2013 along with additional structural measures to be taken to boost economic growth. EU Economic and Monetary Affairs Commissioner Olli Rehn welcomed the new reforms saying these go beyond what the EU Commission recommended. The presented austerity package is an attempt to deliver on fiscal targets announced in July: cutting the budget deficit to 4.5% of GDP next year and to 2.8% in 2014. However, even with the new measures, it is not clear whether Spain will be able to meet these fiscal targets, as GDP growth assumed by the government - a 0.5% contraction next year - seems too optimistic. According to Bloomberg consensus, Spanish GDP will contract 1.3% in 2013, almost three times the government’s forecast.
Importantly, the new budget announcements should pave the way for a Spanish request for EFSF/ESM support, which needs to precede the ECB bond-buying program. With plans assuming more fiscal tightening the government is hoping to head off tougher conditions demanded as part of external support (so-called “conditionality”). We continue to expect Spain will request for EFSF support before its large bond redemptions in the last week of October (EUR 20bn plus a EUR 4bn interest payment). That said, we continue to underline there is high chance that the request will not be made before a sell-off in Spanish debt market acts as a catalyst.