NEW YORK SHARES

By Barbara Kollmeyer, MarketWatch

MADRID (MarketWatch) — Speculation that the wheels could be set in motion for a Spanish bank rescue this weekend rallied stocks in Madrid on Friday, even as the government said no decisions would be taken on aid ahead of a series of reports and audits on the banking sector.

The Spain IBEX 35 index /quotes/zigman/2759620 XX:IBEX +1.83%  outperformed the rest of European markets, up 1.3% to 6,518.90, paring losses from earlier related to disappointment over a lack of strong hints from the Federal Reserve Chairman Ben Bernanke over more stimulus for the U.S. economy.

Spanish stocks moved higher after Reuters reported euro-zone officials would hold a teleconference call on Saturday to discuss the crisis, with a request expected to come from Spain that same day.

However, Deputy Prime Minister Soraya Saenz de Santamaria told reporters Friday that the government would make no decisions on any aid request before the results of various reports on Spanish banks were known.

“The government has to respect the process before taking any decisions about the data of the banks,” said Sáenz de Santamaría, in the televised press conference. She also said there were no plans for any meetings in the coming days, but sidestepped questions about whether a teleconference call would be held.

The Economics Ministry said Friday that the results of the independent audit and stress-testing of Spanish banks will publish June 21. The government has also hired a second set of independent auditors to value the banks, with results expected July 31. As well, said Sáenz de Santamaría, the government was waiting on results expected next Monday, June 11, from the International Monetary Fund report on the banking sector.

The office of the spokesman for Olli Rehn, vice-president of the European Commission, said earlier in the day that there was “no news of a request from Spain and should there be a request, the appropriate instruments are in place and ready to be activated according to the agreed guidelines.”

Something in the works

Predrag Dukic, senior equity sales trader at CM Capital Markets in Madrid said it would be hard for Spain or European officials to come up with any kind of plan ahead of the details of the audits and the IMF report on the banks. But mere hope of a plan rallied stocks Friday, he said.

“Clearly they’re working on something,” said Dukic. “It’s clear a solution will be found. The only question is what sort of solution will be found, how much in terms of money is needed to rescue the Spanish banks? How much will they be requested to provide themselves? How will they avoid the crucial European Union treaty saying you can’t really put money into banks?

“Will it be money from the ESM (European Stability Mechanism) into the FROB (Spain’s bank rescue fund), and then the FROB will inject money into troubled banks? How exactly that will happen is very important,” he said.

Exactly how much Spain’s banks need for a bailout, which has been brought about by a collapse in the housing market and a sharp economic downturn, remains the key number for markets. Dukic said the market seem to be settled on an 80 billion euro ($100 billion) figure, with banks expected to get around €40 billion in any bailout and raise the rest by issuing debt and cutting back on such things as dividends.

Michael Symonds, credit analyst at Daiwa Capital Markets, said officials probably would like to be pre-emptive about any rescue for Spain ahead of the Greek election June 17, meaning the weekend could still produce some sort of bailout framework.

“Nevertheless, I’m less convinced that they’ll be able to definitively agree to a comprehensive solution at such sort notice,” said Symonds in emailed comments. “In particular given what’s at stake, with any ring-fenced support for the Spanish banking potentially setting the blueprint for other bank rescues that may be required elsewhere in the euro area should contagion spread.”

The Bank of Spain said Friday that the country is facing severe problems securing funds and immediate help from the economy wasn’t likely. “The most recent episode of the sovereign debt crisis is having very severe consequences for confidence and for financing conditions,” said outgoing Bank of Spain Governor Miguel Angel Fernandez Ordonez in a speech.

The Economy Ministry said Thursday that Luis Mara Linde will be the next Bank of Spain Governor. The 67-year old has been working at the central bank since 1983.

Dukic and others said right now, markets are only looking at a bank bailout for Spain, and not the entire country, helping to contain some panic. The yield on Spain’s 10-year government bond /quotes/zigman/4869131/delayed ES:10YR_ESP +2.63%  shot above 6.7% last week, to 2012 highs for the year so far, and also close to the 7% level, which precipitated bailouts for Greece and Italy. The yield on Friday rose 16.1 basis points to 6.24%.

“If markets events accelerate the ongoing capital reversal, and spreads continue to widen, given the contagion to other weak economies (eg, Italy has been trading at a spread versus Spain of around 30 to 70 basis points for 10-year bonds), it would be unlikely that the (bailout) program could be circumscribed to the banks only or even to Spain alone,” said Antonio Garcia Pascual, chief economist for southern Europe in a note.

“And for that, there are no sufficient rescue funds readily available,” Pascual said.

Late Thursday, Fitch Ratings downgraded Spain’s debt rating by three notches to BBB, which is just two levels above junk status. “Spain’s high level of foreign indebtedness has rendered it especially vulnerable to contagion from the ongoing crisis in Greece,” said Fitch in a statement.

It added that the “much reduced financing flexibility” of Spanish government is hampering its ability to intervene decisively to help restructure the banking sector and has “increased the likelihood of external financial support.

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