– Initially Transmitted Thursday At 16:44 GMT

MADRID (MNI) – Spanish banks could need additional capital of up to
E62 billion in a worst-case scenario where a deepening financial crisis
and domestic recession depress economic activity and housing prices,
according to audits released Thursday.

Under a more benign scenario of the two anxiously awaited audits –
though still not a particularly rosy one given the current circumstances
– banks could need recapitalization of up to E25.6 billion.

The audit reports, along with another one released earlier this
month by the International Monetary Fund, will serve as the basis for
the Spanish government’s formal request for bank capitalization aid from
the European Union. The IMF put aggregate capital needs at E40 billion.

Eurozone finance ministers agreed earlier this month to lend Spain
up to E100 billion to recapitalize its banks, but said that the figure
was likely to be well above the amount actually needed.

Two private consultants, Oliver Wyman and Roland Berger, were hired
by the Spanish government to give private, independent assessments of
the state of the Spanish financial system.

They conducted stress tests in which they examined banks’ likely
capital needs under a base scenario – considered more likely – and a far
more pessimistic scenario. In the worst case, GDP would plunge 6.5% over
the three years through 2014. Housing prices would drop 26.4%.

Bank of Spain Deputy Governor Fernando Restoy, who presented the
reports at a press conference here, noted that the “stressed” scenario
was significantly more pessimistic than the worst-case assumptions of
the IMF.

“We are talking about the most difficult macroeconomic scenario
that has been contemplated in any of the stress tests that have been
conducted,” Restoy said.

Under the more negative assumptions, Wyman put banks’ aggregate
capital needs – the amount of additional capital required to remain
solvent in the face of greater losses – in a range of E51 billion to E62
billion. Berger put the figure at E51.8 billion.

In the base scenario, Wyman calculated capital needs between E16
billion and E25 billion. Berger put the figure at E25.6 billion.

Spain’s Secretary of State for the Economy, Jimenez Latorre, also
speaking at the press conference, said the results of the two
independent stress tests should offer “tranquility and security to the
markets,” since there is a comfortable margin for banks to meet their
capital needs.

In the tests, whose guidelines were used by both consultants, the
level of core capital would be 9% of risk-weighted assets in the base
scenario and 6% in the worst case.

Latorre conceded that the EU would impose “significant” conditions
on individual banks requiring recapitalization aid. Whether that might
include liquidating some banks or creating a so-called “bad bank” to
hold toxic assets would depend on what Spain’s European creditors want,
he said. He noted that “Brussels likes” the idea of a bad bank.

But he said it was impossible to specify exactly what measures
Brussels would impose. “We are just starting to talk. All of that has to
be nailed down as we get closer to the signing of the memorandum,” he
said.

Spain’s Finance Minister, Luis de Guindos, had planned on making a
formal aid request to his counterparts at tonight’s Eurogroup meeting in
Luxembourg, but announced earlier today that he was going to postpone
it.

Today’s reports did not break down capital needs by individual
banks. The government in Madrid has commissioned yet another audit – by
Deloitte Touche Tohmatsu International, PricewaterhouseCoopers, Ernst &
Young LLP and KPMG International – to examine the books of individual
banks and determine the capital needs for each. Their report is due on
July 31.

–Paris bureau, +331-42-71-55-40; bwolfson@marketnews.com

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