Delayed Detailed Spain Bank Audit Increases Bailout Speculation

Investor concern that Spain will need more than its €100bn proposed bailout from the International Monetary Fund (IMF) has increased after an unnamed source cited by Bloomberg said that Spain will be delaying its bank balance sheet audit until the end September this year.

The source said that officials decided to give the group of auditors, PricewaterhouseCoopers, Deloitte, Ernst & Young and KPMG Europe another two months to complete its assessment of Spain's 14 main banking groups' balance sheets.

In a separate set of stress tests, independent consultancies Oliver Wyman and Roland Berger Strategy Consultants are due to publish their findings by June 21.

The audit and stress tests are crucial for Spain determining how much it will need in bailout funds, in order to help prop up its ailing economy.

On June 9 this year, Spain agreed on a rescue package of up to €100bn.

While the markets are speculating on the exact details of the audit, the Bank of Spain did confirm that bad loans as a proportion of total lending jumped to the highest level since 1994.

In reports earlier this month, analysts indicated the critical nature of Spain's situation.

"Banks can break Spain's back," said a group of analysts at RBS. "We estimate bank liabilities may push Spanish debt/GDP to 110%, including regional and local authority debt and unpaid bills. Moreover, if a resolution regime is not implemented quickly, the potential capital creation effect from haircutting outstanding subordinated bonds will rapidly disappear.

"Spain alone cannot bear the weight of all its banks. Bank liabilities could be the straw that breaks the camel's back, bringing Spain's debt/GDP ratio well over 100% and resulting in more austerity, similar to what happened in Ireland in 2009," they added.

In the meantime, the results of Spain's Treasury bill sale today revealed that the government borrowed €3.04bn in 12-month and 18-month paper.

The one-year paper (€2.4bn) priced to yield 5.074 percent and a full 2 percent higher than at a similar auction in May. The 18-month portion (€639m) priced to yield 5.107 percent, 1.8 percent dearer than in the May sale.

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