Haaretz Daily

Urgency reflects growing consensus that Spanish collapse might start chain reaction that could topple Italy and destroy the euro

The first planks in a dramatic bailout for Spain will be bolted together this weekend, with a final figure on the size of the rescue package to be ready within a week, according to sources in Brussels and Madrid.

The moves towards bailing out the finance sector of the eurozone's fourth biggest economy reflect a growing consensus that a Spanish collapse must be averted to prevent a devastating chain reaction that could bring down Italy and destroy the single currency. There were fears that this would spark a global downturn extending to the US and China, and both countries urged Europe to move swiftly to fix its long-running debt crisis.

President Barack Obama called on European leaders on Friday to strengthen their banks and urged Greece to remain in the eurozone. "There is a path out of this challenge," Obama told reporters at the White House. "These decisions are in the hands of Europe's leaders; they understand the urgent need to act. There are specific steps they can take right now to prevent the situation from getting worse. One of those steps is taking clear action as soon as possible to inject capital into weak banks."

With fears that Greek voters may add further fuel to the fire by electing a government that will lead them out of the euro on 17 June, Spain hopes to have a final figure ready by next Friday, sources in Madrid said.

Senior finance officials from around Europe are due to start drawing up detailed plans this weekend on how to shore up Spain's banks in a so-called "bailout lite" that would be smaller and less onerous than those of Portugal, Greece or Ireland. Spain must formally request help and last night Vitor Constancio, vice-president of the European Central Bank, told Portuguese radio that Spain was expected to do so "soon", according to Reuters.

Prime minister Mariano Rajoy's conservative government insists that a full and final figure on its needs can only follow independent valuations of the country's banking assets. The deadline for delivery of those estimates is 21 June, when eurozone finance ministers are due to meet, but the Spanish government is pressing auditors to provide them by the end of the week.

"No decisions have been made," Spain's deputy prime minister, Soraya Sáenz de Santamaría, said . "The government will declare its position once it knows the estimates."

A first indication would come by Monday, she said, with an International Monetary Fund report on Spain. That is expected to say that Spanish banks need a capital injection of €40bn (£32bn) and may be considered sufficient for a preliminary bailout request over the weekend, especially as the government has already seen the figures.

It remained unclear, however, when an announcement would come and how detailed it would be.

A Spanish bailout will almost certainly be targeted directly at its banks, avoiding a wider crisis that could prevent Spain borrowing on the markets to fund government spending.

Payment would probably be made by the European Financial Stability Facility to Spain's bank restructuring fund, known as the Frob. Speculation about the amount needed varies wildly. Three former savings banks, including the recently nationalised Bankia, have already asked for €28bn.

Spain's senior banker, Santander boss Emilio Botin, has said €40bn would be enough, but a second recession in three years will inflict further damage on a banking system already struggling to digest vast amounts of toxic real estate left over from a burst housing bubble.

The ratings agency Fitch estimates Spain's banks need additional capital of between €50bn and €100bn, though part of this could be covered by the banks themselves, with stronger banks such as Santander and BBVA avoiding state aid. Neighbouring Portugal, which has a much smaller economy, accepted a €78bn euro bailout.

It would be the first time that a mechanism aimed directly at a national bank restructuring fund has been used and it was unclear what European officials would demand in return.

Experts said Rajoy's attempts to wriggle out of external control of Spain's economy were doomed to failure. "The terms and conditions are going to want to see a clear path to restore growth and structural budget balance. That will include structural reforms and fiscal measures," said Luis Garicano, of the London School of Economics. "But I guess they will try to find a face-saving way of doing this."

"There will have to be conditions, otherwise what will the Germans say to their voters?" said Santiago Carbó, of Granada University. "They won't be as detailed as for Greece or Portugal, but they won't just be about restructuring the financial sector."

Pension reforms, increases in sales tax, a pruning of Spain's three million-strong civil service and further pressure on the government to slash its deficit with austerity measures could be on the list of demands. Concerns about the people running Spain's former savings banks, whose loans to property developers and speculators have poisoned the whole financial system, may also see demands that political appointees be removed from boards.

Spaniards are deeply pro-European and were not thought likely to turn their rage against the EU despite the prospect of even more suffering. A recent poll said 62% per cent already expected a bailout.

Spain has repeatedly warned that its economy is too big to fail without bringing down the euro.

Ministers have said the euro's fate will be played out in Spain and Italy over the coming weeks, while challenging European colleagues to agree a plan for greater banking and fiscal union in order to calm market pressure.

With European institutions and other countries now increasingly in favour of such a union, pressure on Spain's borrowing costs has relaxed over the past week despite a sudden downgrade by the Fitch ratings agency on Thursday.

Unemployment in Spain is already at 24% and a douple-dip recession looks likely to last until well into next year, bringing more misery.

The European commission said Spain had made no request for aid, but a spokesman added that if it did, the eurozone was ready to help.

"If such a request were to be made, the instruments are there, ready to be used, in agreement with the guidelines agreed in the past," spokesman Amadeu Altafaj said. "We are not at that point."

Germany's chancellor, Angela Merkel, denied pressing Spain and said it was up to Rajoy to request a bailout. "It's down to the individual countries to turn to us," she said. "That has not happened so far."

Unnamed German officials told Reuters, however, that an agreement needed to be hammered out before the Greek election next weekend.

The behaviour of executives at Spain's savings banks or cajas is now coming under scrutiny as the sector prepares to seek taxpayer bailouts

As European taxpayers prepare to rescue Spain's ailing banks, anti-corruption prosecutors, academics and regional parliaments are uncovering a tale of greed, cronyism and political meddling that has brought many of the country's leading savings institutions to their knees.

With the fourth biggest lender, Bankia, demanding €19bn (£15.4bn) and authorities now admitting a further €9bn is needed by two former savings banks – CatalunyaCaixa and Novagalicia – concern is focusing on both the mushrooming bill and the way banks have been run.

Court investigators are also scrutinising payments to former senior executives and the part-flotation of Bankia, in which 350,000 small investors saw two-thirds of their money wiped out.

The bill that Europe's rescue funds must pay has been increased by the multi–million euro payoffs taken by some senior executives shortly before their banks collapsed and decisions taken by unqualified board members who admit they were incapable of analysing the banks' books. Boards were stuffed with political placements or people who had little idea about banking – including, in one case, a supermarket checkout worker.

They often rubber-stamped decisions. In some cajas they were rewarded with well-paid positions on the boards of subsidiary companies as well as with luxury foreign trips and soft loans.

Trips to India, China or Chicago and the hundreds of millions of euros in loans to executives, board members and their families formed part of the gravy train of political favouritism and cronyism.

Chairmen were often unqualified politicians, with academic investigators finding a close relationship between the size of a bank's bad loan book and the inexperience, lack of qualifications and degree of politicisation of the chairman.

A committee in the Valencia regional parliament is looking into how the Caja de Ahorros del Mediterraneo (CAM) – described by the Bank of Spain as "the worst of the worst" – collapsed last July.

"Did I check through the accounts?" asked José Enrique Garrigós, a small businessman who was a CAM board member. "Look, I'm an average businessman, I don't have the time or the training to do that."

He said that other board members at the savings bank, based in Alicante,, eastern Spain, included a checkout worker and a sociologist. A dance teacher, an artist and a university psychologist were also reportedly on the board.

"The things we have been hearing are surreal," said Mireia Mollà, a regional MP for the leftwing Compromis party. "We still don't know what payments senior management took with them when they abandoned the ship."

Some board members have suggested that minutes of meetings may have been tampered with. They question, for example, whether they were ever really consulted on key matters such as executive pay or warnings from the Bank of Spain that the caja was in dire straits.

"I didn't see the official minutes as the law requires," said Jesús Navarro, another board member. "Except on a computer screen."

AAnalysing the accounts would have required her to be a superwoman, complained one CAM board member. "I didn't have sufficient financial, legal or accountancy skill… board members were not legally required to have any sort of qualifications or experience," agreed fellow board member Juan Pacheco.

This left control of CAM in the hands of chairman Modesto Crespo, director general Roberto López Abad and a few senior executives, they said, with the board effectively rubberstamping their decisions.

"There was barely any debate and votes were … unanimous," said Pacheco.

"One board meeting a year was held abroad," said Navarro. "I refused to go on principle." But he admitted attending a meeting hundreds of miles away in San Sebastian with some 50 other people: "Obviously I went with my wife, and the rest of the board took their partners too."

Over six years, board members and senior executives – or their families – received €161m in loans, often at soft interest rates, according the Workers Commissions trade union. Senior executives doubled their salaries over the same period.

Cajas as a whole gave senior management a 50% pay rise over that period, though profits only rose 7%, the union said.

Mireia Mollà, a regional MP for the leftwing Compromis party, said a common way of getting round limits on paying board members at the not-for-profit CAM was to give them well-paid places on boards of companies owned – or part-owned – by the bank.

LLocal politicians appointed many board members and used cajas to fund pet projects.

"The use of cajas as the banks of regional governments is part of the origin of the problem," said Alvaro Anchuelo, an MP for the small, centrist Popular and Democratic Union party. "They used them to finance airports with no flights and theme parks that failed."

Two days before the collapse of CAM, the bank reportedly loaned €200m to the cash-strapped regional government of Valencia – run by prime minister Mariano Rajoy's People's party, which also controlled most board appointments.

Part of CAM's senior management had opted for early retirement as the bank headed towards disaster, with six members, including director-general López Abad, estimated to have left with payoffs jointly totalling more than €10m.

Similar stories of multimillion euro payments are emerging from other cajas, which have now been forced into takeovers or mergers to form commercial banks – with the savings banks as shareholders.

Bankia, for example, paid executive Matías Amat €6.2 m for taking early retirement. Bancaja, one of the seven cajas that merged to form Bankia, reportedly owes executive Aurelio Izquierdo €14m.

CAM was nationalised and sold for €1 to Banco Sabadell after receiving €3bn from Spain's bank restructuring fund – which now looks incapable of meeting the financing of other former savings banks.

Attempts to investigate Bankia have been blocked by the People's party in the national parliament and the Madrid regional assembly, but Spain's attorney general has admitted that it is under investigation. Twelve of the 45 cajas that existed three years ago are reportedly being looked at by anti-corruption investigators.

On Thursday, the Catalan parliament agreed to set up a committee to look at banking problems as a whole.

"If we really knew the truth about Bankia and the other cajas, the two big parties – the People's party and the socialists – would explode," said Arsenio Escolar, editor of the 20 Minutos newspaper.