Europe bailout of Spain could cost $125 billion

MADRID (AP) ? Europe is to offer Spain a bailout package of up to ?100 billion ($125 billion) to help rescue the country's banks and keep the 17-country eurozone from breaking apart.

After months of fierce denials, Spain admitted it would tap the fund as it moved faster than expected to stem the economic crisis that has ravaged Europe for two years.

Spain becomes the fourth - and largest - European economy to ask for help and its admission of help comes after months of market concern about its ability to pay its way. In recent weeks investors have demanded higher and higher costs to lend to Spain, and it became clear it would be just too expensive for the country to borrow the money necessary for a bank rescue from the markets.

The three countries that have received rescues thus far ? Greece, Ireland and Portugal ? are fairly small, and many have worried that bailing out much-larger Spain could call the entire euro project into question. Cyprus, also a small economy, could also be forced to seek a bailout soon.

Economy Minister Luis de Guindos said Saturday the aid will go to the banking sector only and so would not come with new austerity conditions attached for the economy in general ? conditions that have been an integral part of previous bailouts to Portugal, Ireland and Greece.

A statement from the finance ministers of the 17 countries that use the euro explained that the money would be fed directly into a fund Spain set up to recapitalize its banks, but underscored that the Spanish government is ultimately responsible for the loan.

Still, that plan allows Spain to avoid making the onerous commitments that Greece, Ireland and Portugal were forced to when they sought their rescues. Instead, the eurogroup statement said that it expected Spain's banking sector to implement reforms and that Spain would be held to its previous commitments to reform its labor market and manage its deficit.

The exact figure of the bailout, however, has not yet been decided. De Guindos said the country is waiting until independent audits of the country's banking sector have been carried out before asking for a specific amount. The audits are expected June 21 at the latest.

De Guindos did say, however, that Spain would request enough money for recapitalization, plus a safety margin that will be "significant." The eurogroup statement said that meant the cost could reach ?100 billion. The aid package was announced after a video conference of euro zone finance ministers.

With markets in turmoil, de Guindos said the government's efforts to shore up the financial sector "must be completed with the necessary resources to finance the needs of recapitalization."

"Therefore, the Spanish government states its intention to request European financing for the recapitalization of banks that need it," the minister told a press conference after a videoconference with colleagues from the eurozone.

The Spanish acceptance of aid for its banks is a big embarrassment for Prime Minister Mariano Rajoy, who insisted just 10 days ago that the banking sector would not need a bailout. For him and officials of his government, that had become something of a mantra. He was elected in November and walked right into a hurricane.

International pressure on Spain to solve its financial problems has been growing in recent weeks. On Thursday ratings agency Fitch hit Spain with a three-notch downgrade of its credit rating. That left it two levels above junk status. Then on Friday, Moody's Investor Services warned it could downgrade Spain and other countries in the eurozone.

In the early hours of Saturday, the International Monetary Fund released a report estimating that Spanish banks need a recapitalization injection of at least ?40 billion ($50 billion) following a stress test it performed on the country's financial sector. That report came out three days ahead of schedule, underscoring the urgency of the situation.

U.S. President Barack Obama, facing re-election, enduring a weak economy and in need of strong trading partners, expressed concern late Friday over the European economic crisis.

U.S Treasury secretary Timothy Geithner welcomed Spain's decision and the offer of European support, describing them as "important for the health of Spain's economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area."

French Finance Minister Pierre Moscovici said the deal would "contribute to restoring confidence in the eurozone."

"The accord announced tonight speaks to a reinforced solidary among the countries of the eurozone and to their resolute desire to ensure its stability," he said in a statement.

Some of Spain's banks are struggling with by toxic real estate loans and assets. The Bank of Spain says they total around ?180 billion. Nationalized lender Bankia, SA, which has requested ?19 billion in aid, has ?32 billion in toxic assets. Around four other banks are considered prime candidates for bailouts. De Guindos said Saturday the sector is largely solid and the euro zone package will be funnel toward only about 30 percent of it.

Analyst Rafael Pampillon if IE Business School in Madrid said the bailout addressed the uncertainty the markets had felt about how Spain's debt-laden banking sector would recapitalize.

"This uncertainty, and hence the panic, will slowly dissipate from the markets," he said. Pampillon added that with polls forecasting a pro-Euro victory in Greek elections, markets would be further relieved because the austerity conditions imposed on Greece would most likely be fulfilled.

Moody's said Spain's banking problem is largely confined to that country and not likely to spill over to other eurozone nations, with the exception of Italy ? where the European Central Bank has already stepped in to buy government bonds as a way to help lower the country's borrowing costs.

Spain has been criticized for being too slow to set out a roadmap to resolve its problem. European business leaders and analysts have stressed that Spain must find a solution quickly so that it is not caught up in any market turmoil sparked by the Greek elections on June 17. There are concerns that anti-bailout left-wing party Syriza could become the largest party in the Greek parliament, putting the country's membership in the eurozone at risk.

But others said it's more important for Spain to correctly assess how to shore up its banking system than it is to hurry into a bailout ahead of the Greek elections.

If Spain doesn't get a request for outside help right the first time, "then you are in second bailout territory," said Mark Miller, an analyst with Capital Economics in London.

Working in Spain's favor is the fact that its public debt is actually quite low, at 68.5 percent of its gross domestic product at the end of 2011.

Its debt is predicted to hit 78 percent by the end of the year, but even that figure would be below the debt-to-GDP ratios of Europe's strongest economy, Germany, which is at 82 percent.

But Spain's in its second recession in three years, with unemployment at nearly 25 percent and little hope for improvement this year. Prime Minister Mariano Rajoy's government has imposed a wave of austerity measures since he took office in December that have raised taxes, made it cheaper to hire and fire workers and cut government funding for education and health care.

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DiLorenzo reported from Paris. Associated Press writers Juergen Baetz in Berlin, Slobodan Lekic in Brussels, and Alan Clendenning and Harold Heckle in Madrid contributed to this report.

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