SPAIN is expected to ask the eurozone for help with recapitalising its banks at the weekend, sources in Brussels and Berlin said on Friday, becoming the fourth country to seek assistance since Europe's debt crisis began.
Five senior EU and German officials said deputy finance ministers from the single currency area would hold a conference call on Saturday morning to discuss a Spanish request for aid, although no figure for the assistance has yet been fixed.
Later the Eurogroup, which consists of the euro zone's 17 finance ministers, will hold a separate call to discuss approving the request, the sources said.
"The announcement is expected for Saturday afternoon," one of the EU officials said.
The dramatic move comes after Fitch Ratings cut Madrid's sovereign credit rating by three notches to BBB on Thursday, highlighting the Spanish banking sector's exposure to bad property loans and to contagion from Greece's debt crisis.
"The government of Spain has realised the seriousness of their problem," a senior German official said.
He added that an agreement needed to be reached before a Greek election on June 17 which could cause market panic and increase the possibility of Athens leaving the euro zone if left-wing parties opposed to Greece's EU/ IMF bailout win.
The EU and German sources spoke to Reuters on condition of anonymity due to the sensitivity of the matter.
The European Commission's spokesman on economic affairs said Spain had made no request for aid and he would not confirm that a conference call was planned. But he added that if Spain did make a request, the euro zone 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," Amadeu Altafaj said. "We are not at that point."
Speaking in Berlin, German Chancellor Angela Merkel said she was not pressing any country to take a bailout, saying it was up to Spain to decide what it wanted to do: "It's down to the individual countries to turn to us," she said.
"That has not happened so far, and therefore (we) will not exert any pressure."
In Madrid, where the Spanish cabinet held a weekly meeting, a government spokeswoman said she was not aware of any pending announcement on a bank rescue. She recalled that Prime Minister Mariano Rajoy said on Thursday he would await the outcome of two external audits due later this month before considering how to recapitalise troubled lenders.
Spain is expected to request aid from the euro zone's €440bn bailout mechanism, known as the European Financial Stability Facility.
The amount will depends on the results of audits being conducted by the International Monetary Fund and two independent assessors.
Financial industry sources told Reuters on Thursday that a report by the IMF, to be handed to Spain on Friday and expected to be made public on Monday, had estimated Spanish banks' minimum capital needs at €40bn, rising to €90bn for a fuller recapitalisation.
A separate independent audit of the banking sector, commissioned from consultants Oliver Wyman and Roland Berger, which the government has flagged as crucial, is due on June 21.
Officials in Spain said the parameters for the IMF and the private-sector audits were effectively the same, meaning Spaincould make the request for aid on the basis of the IMF figures rather than having to wait for the other audit to be finished.
The euro zone has been under strong pressure from the United States, China, Canada and other major partners to take swift, decisive action to prevent the debt crisis spreading and causing greater damage to the world economy.
Fitch said the cost to the Spanish state of recapitalising banks stricken by the bursting of a real estate bubble, recession and mass unemployment could be between €60bn to-€100bn - or 6 to 9pc of Spain's gross domestic product. The higher figure would be in a stress scenario equivalent to Ireland's bank crash.
European shares and the euro fell amid mounting concern over Spain following the Fitch downgrade. Spanish bond yields rose after the steep credit rating cut.
While Spain would join Greece, Ireland and Portugal in receiving a European financial rescue, officials said the aid would be focused only on its banking sector, without taking the Spanish state out of credit markets.
That would be crucial to avoid overstraining the euro zone's rescue funds, which would struggle to cover Spanish government borrowing needs for the next three years plus possible additional assistance for Portugal and Ireland.
"I think they're trying to get a lighter support package, where the money is headed to the banks and not for financing the fiscal deficit," said Vincent Chaigneau, head of rates strategy at Societe Generale. "But you need to know the details, the size of the programme and who participates."
While funds would be paid to Spain from the EFSF, it remains unclear whether they will go directly to the Spanish state or to the government's bank assistance fund known as the FROB.
Either way, analysts say the aid will accrue to Spain's budget deficit.
The sudden escalation of the Spanish banking crisis, dramatised by last month's hasty nationalisation of troubled lender Bankia, has contributed to raising Italy's borrowing costs towards danger levels as well as Spain's..
The deputy governor of the Bank of Spain told parliamentarians on Thursday that 9 billion euros would also be needed to cover additional losses at nationalised banks CatalunyaCaixa and NovaGalicia, according to one source.
The aim of a rescue package would be to relieve pressure on the state while enabling it to keep borrowing on markets.
A "bailout lite" would also help salve Spanish pride. Spainis the world's 12th largest economy and No. 4 in the euro zone. EU and German officials have cited prickly national pride as a barrier to requesting a full assistance programme.
Any political conditions would be light, related to the banks and would probably not add to the austerity measures and structural economic reforms which Rajoy's government has already put in place, EU and German sources said.
The European Commission and Germany both agreed in principle last week that Spain should be given an extra year to bring its budget deficit down below the EU limit of 3 percent of gross domestic product because of a deep recession.