The talks come a day
after the International Monetary Fund said Spain's banks need at least
40 billion euros (about $46 billion) in fresh capital to preserve the
country's financial stability.
An IMF mission visited
Spain and conducted "stress tests" on banks. In its report, released
Friday, the IMF recommended that considerably more capital be set aside
for the country's most vulnerable banks to cover "restructuring costs
and reclassification of loans."
The Spanish government
and the Council of the European Union both denied that Spain had already
requested aid for its struggling banks.
The IMF's executive board
emphasized that bank stress tests did not attempt to represent the full
scope of capital needs. That could take the total required to between
60 billion and 80 billion euros, according to IMF officials.
The IMF assessment --
roughly in line with that of ratings agency Fitch -- came on the eve of
critical talks between the Spanish government and European institutions
over the terms of aid to Spanish banks, which are saddled with bad debt,
much of it property-related.
Spain's deputy prime
minister, Soraya Saenz de Santamaria, said Friday the government was
awaiting the IMF report before taking a decision on its next steps.
Other investment banks have estimated the needs of Spanish banks at in excess of 100 billion euros.
"The extent and
persistence of the economic deterioration may imply further bank
losses," said Ceyla Pazarbasioglu, head of the IMF team that conducted a
recent visit to Spain.
"Full implementation of
reforms, as well as establishing a credible public backstop, are
critical for preserving financial stability going forward."
The IMF said that while the core of Spain's financial sector is well managed, "important vulnerabilities remain in the system."
Successive Spanish
governments have taken action to consolidate banks, creating the fourth
largest -- Bankia -- out of a number of failing financial institutions.
But late last month, Bankia sought a further 19 billion euros in capital
to shore up its balance sheet.
One analyst told CNN
that the Spanish authorities had "run out of ammunition" in their
efforts to recapitalize banks, with the government's own borrowing costs
rising to about 6.5% for the 10-year sovereign bond in recent days. The
analyst did not want to be named because of his close connection to the
government.
A yield of 7% is widely
regarded as unsustainable, and has led other EU states such as Ireland
and Portugal to seek European and IMF assistance.
Fitch cut Spain's sovereign credit rating by three notches Thursday.
One issue that has
unnerved markets is the difficulty in assessing the strength of Spanish
banks because of what the IMF report calls "their differences in
management quality and risk management philosophies."
Larger banks such as
Banco Santander and BBVA are regarded as sufficiently diversified and
robust to avoid further injections of capital.
But the IMF noted that
"in recent years, a gradual approach to taking corrective action allowed
weak banks to continue to operate to the detriment of financial
stability."
The impact of the global
financial crisis, which caused a severe recession and soaring
unemployment in Spain, exposed weaker banks with large portfolios of bad
debt.
But the IMF says "some
of the weak entities were merged into larger but still weak ones, while
delays in taking corrective action meant that vulnerabilities were not
addressed or were allowed to grow."
The governor of the European Central Bank, Mario Draghi, has made similar criticisms in the past week.
Financial analysts say
instilling confidence into the Spanish banking system is urgently needed
to prevent troubles affecting Greece from spilling over, as markets
question the viability of the eurozone, which has 17 members.(Tim Lister e Al Goodman per "CNN")
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