ForexSapce.com - While trader eyes remain fixed on any Ben Bernanke’s speech at Capitol Hill, the fallout from the on-going struggle in Europe continues to make dents on the global economic picture. During his speech Bernanke spoke of the need for European leaders to take “additional steps” to contain the escalating crisis, underlining the far-reaching potential consequences of a failure to resolve the region’s economic problems.

Standard and Poor’s ratings agency said Thursday that Spain’s struggling banks will need government or EU aid if they have to book loan losses of 80 to 112 billion euros ($100-140 billion) this year. “Pressure is building for Spanish banks to recognize provisions against the likely losses in both 2012 and 2013 already this year”, a statement from the ratings agency said.

As soon as such recognition is achieved, S & P’s added “Spain’s banks would require substantial capital to continue complying with current minimum regulatory capital ratios. This would consequently increase the likelihood of support from the Spanish government or the EU.”

IMF report adds concern

The International Monetary Fund (IMF) has also added its two penny’s worth today. A report due to for release on Monday revealed that the IMF foresees Spanish banks needing a cash injection of at least 40 billion euros (32 billion pounds) in order to stabilise its banks.

It expects that a further 50bn will be required to stabilise the banking sector in general. "The capital shortfall for the Spanish banks will be around 40 billion euros after taking into account the capacity from some of the entities to cover expected losses with their own resources," a source told Reuters.

The IMF report, along with the SP recommendations and an audit of the Spanish banking sector conducted by consulting firms Oliver Wyman and Roland Berger, will help determine the size of a bailout for Spanish lenders currently being explored in Madrid, Brussels and Berlin as a way to restore confidence in Spain and the euro zone.

Auction restores temporary faith

A relatively positive Spanish auction this morning caused yields to rise less than previously feared by analysts, with Spain selling 2.1 billion euros of two, four and ten year debt. "It was a little bit better than I was expecting,” Sergio Capaldi, fixed income strategist at Intensa SanPaolo, said. “Of course they have issued the maximum amount that they were targeting and this is good news.

"Only the tail of the auction was a little bit too fat. That signals anxiousness on the part of the investors, so that was the only weak spot of the result of this auction."       

Some commentators have now argued that the sale was helped by a more favourable attitude to risk sentiment in recent sessions – a move that the AUD rally this morning will testify – with the need to restore stability to the Spanish banking sector remaining a clear priority.

Senior Spanish officials continue to insist that the IMF report should show that 70 percent of the banking sector is sound and can cope on its own with the current financial storm. It also adds that the government is well positioned to deal with the rest of the sector. Prime Minister Mariano Rajoy said Saturday that nationalised lender Bankia, which has requested a 19-million-euro rescue by the state, represented the bulk of the remaining 30 percent.

But with unemployment in the nation continuing to disappoint, at more than 24 percent, and the economy in its second consecutive recessive growth rate, there are concerns that the rate of non-performing loans could rise.

Sarah Cox, Staff Writer