Without waiting for a widely expected EU rescue, credit ratings agency Fitch cut Spain's sovereign rating to BBB from A with a negative outlook, saying Madrid was especially vulnerable to a worsening of the euro zone debt crisis.
Spanish Prime Minister Mariano Rajoy said he would wait for the results of independent audits of the banking system before talking with Europe about how to recapitalise troubled lenders.
Finance Minister Luis de Guindos said on Wednesday (6 June) that Spain would take a decision within 15 days, prior to an EU summit scheduled on 28 June where European leaders are expected to agree a roadmap for greater economic integration.
An International Monetary Fund report due out next Monday is expected to show Spanish banks need at least €40 billion, financial sector sources said.
Fitch estimated Spanish lenders need €50 to €60 billion in capital under their updated base case. However, the total fiscal cost to underpin the banks could rise as high as €100 billion or 9% of gross domestic product in a more extreme scenario similar to Ireland's bank meltdown, it said.
Merkel says Germany ready
Speaking after talks in Berlin with British Prime Minister David Cameron – who called for "urgent action" to tackle the debt crisis – German Chancellor Angela Merkel said Germany stood ready, alongside the other 16 euro zone countries, to do whatever was necessary.
"It is important to stress again that we have created the instruments for support in the euro zone and that Germany is ready to use these instruments whenever it may prove necessary," she said, referring to the euro zone's temporary bailout fund, the EFSF, and to its permanent successor, the ESM.
If Spain does decide to seek help with recapitalising its banks, laden with bad property debts and other underperforming loans, it is expected to ask for funds from the €440 billion EFSF or the €500 billion ESM, due to be operational in July.
'Minimalist approach' sought
One senior EU official indicated that Spain could take a "minimalist" approach to recapitalisation, requiring €30-40 billion – for four or five weaker institutions, or else a "maximalist" line which might need as much as €100 billion.
"Politicians tend to prefer doing the least that's required, so in the case of Spain, it seems likely that a minimalist approach will be taken," the official said.
Spain has so far made no application for European aid, and officials say it is determined to avoid the kind of humiliating policy conditions and intrusive quarterly EU/IMF inspections imposed on Greece, Ireland and Portugal.
While a rescue loan may be presented for political reasons as going to Spain's FROB bank resolution fund, legally European bodies can lend only to the state, EU officials say. That raises the question of what policy conditions and monitoring would be attached to any assistance.
Under the rules of the EFSF, so far used to bail out Ireland and Portugal, countries can receive aid for their banks without having to submit to the same strict 'conditionality' as under a full bailout programme.
Successful bond auction
Despite the pressure from the credit downgrade, Spain demonstrated it could still tap credit markets, raising all the money it required, although at a higher cost. Madrid sold €2.1 billion of government bonds, paying just over 6% for 10-year debt – up from 5.74% last month and the highest at auction since 1998.
The sale laid to rest – at least for now – fears raised by Treasury Minister Cristobal Montoro on Tuesday that Spain was being shut out of credit markets.
In the midst of the storm, Spain nominated a new central bank governor, Luis Maria Linde, aiming to restore the Bank of Spain's credibility, battered by its handling of the banking crisis. He was preferred to outgoing European Central Bank executive board member Jose Manuel Gonzalez-Paramo.