Spain in Vain: Fitch Downgrades Spain Two Notches Above Junk Status, Calls For Bailouts Grow

Spain's Mariano Rajoy, U.K.'s David Cameron, Germany's Angela Merkel

As if the pressure on European Union leaders to figure out a way to recapitalize Spanish banks wasn’t strong enough, Fitch Ratings has just downgraded Spain’s sovereign credit rating by three notches to a BBB, two steps above junk status, citing “policy missteps” and the country's severely exacerbated economic crisis as the reason, the Wall Street Journal reports.

Spanish Prime Minister Mariano Rajoy says he is waiting on a full assessment of the Spanish banking sector before he reveals Spain’s capital needs.

In the meantime, Europe leaders called emergency meetings on Thursday to figure out how to deal with the Spanish crisis. The Fitch downgrade comes hot off the heels of Spain admitting that its banking sector needs financial assistance and that its government is losing access to capital markets.

“Spain's Mr. Rajoy said at a news conference, after meeting his Dutch counterpart Mark Rutte, that he won't disclose any figures on the cleanup of Spain's banking system until the International Monetary Fund releases its assessment of the country's banking sector,” the Journal reports.

“He added that the government would also wait to disclose figures until it receives in the coming weeks an evaluation of the banking system commissioned to two foreign consulting firms, Roland Berger Strategy Consultants of Germany and Oliver Wyman of the U.S.,” the report adds.

As many Blaze readers know, Spain’s banking sector suffered greatly after the country's real estate market fell apart. Add to that the fact that Spain is also trying to address its monstrous budget deficit and you can see things are pretty serious over there.

EU leaders have been waiting on a scheduled International Monetary Fund (IMF) report to see what kind of capital assistance Spain needs. However, with the sudden spike in Spain’s borrowing costs, some leaders may forego the report and decide on a rescue package anyway.

Spanish Prime Minister Mariano Rajoy

“Germany, in particular, has resisted calls from Spain and other euro-zone countries to allow Spanish banks to directly tap Europe's rescue fund, the European Stability Mechanism, set up to bail out governments in fiscal straits,” the Journal reports.

“The Group of Seven leading industrialized nations have pressed European leaders to act more aggressively to contain Spain's problem before the euro-zone debt crisis inflicts more damage on the world economy and financial markets,” the report adds.

Fitch reports that the cost of saving Spain’s banks could cost up to €60 billion to €100 billion ($75 billion to $126 billion). The EU really doesn’t have that kind of capital lying around.

U.K. Chancellor of the Exchequer George Osborne said Thursday that Spain needs “an injection of money to recapitalize” its banking sector.

"You would need to sort out immediately the situation in the Spanish banking system and resolve the uncertainty there," he told BBC radio when asked how the EU could solve its debt and economic crisis.

Many analysts believe British Prime Minister David Cameron will try to convince German Chancellor Angela Merkel to agree to “decisive action” during a meeting in Berlin on Thursday. Cameron has called on EU leaders need to act immediately and to do more to address the EU’s financial crisis or else the 17-nation union will suffer a breakup.

Opposing the idea of giving Spain access to any sort of EU bailout fund is Dutch Prime Minister Mark Rutte, a strong Merkel ally.

“The immediate needs of Spanish banks have overshadowed EU discussions for longer-term solutions for regulating and safeguarding its banking system,” the Journal reports. “Earlier this week, Ms. Merkel signaled acceptance of the need for an EU-wide bank supervisor for the largest banks. On Wednesday the EU proposed legislation for dealing with failing banks that aims to shift the cost of future bank collapses away from taxpayers and onto investors.”

However, some analysts think that by the time the months-long plans take effect, Spain’s problem would already be well out of hand.

"The Spanish banking system is the most important thing to deal with in the short term," said Swedish Finance Minister Anders Borg.