Spanish Aid Plan Is Flawed, Says IMF

Spain said its crisis-hit banks will need as much as €62 billion ($78.75 billion) in new capital to absorb losses from a real-estate meltdown, as the International Monetary Fund warned that the euro-zone plan to aid the country may not work, The Wall Street Journal reported. Spanish lenders have been pummeled by a dive in property prices that hasn't yet bottomed out, as loans to households are going bad amid record-high unemployment. The cost of bailing out the banks will drive up Spain's debt load and threatens to freeze the country out of international markets, which could send shock waves across the euro zone. The currency bloc has promised Spain as much as €100 billion in aid, but because it will ultimately add to the government's debt load, investors have been dumping the country's bonds, driving up its funding costs. The IMF, which is a contributor to the European rescue programs and is providing technical assistance for the Spanish bank support, on Thursday came out sharply against the euro zone's insistence that any aid be channeled through the government. The euro zone needs to quickly set up a mechanism that allows it to directly recapitalize weak banks, "in order to break the negative feedback loop that we have between banks and sovereigns," IMF Managing Director Christine Lagarde said after a meeting with the bloc's finance ministers in Luxembourg. Ms. Lagarde also called for "creative and inventive" measures from the European Central Bank, suggesting that the bank could restart its bond-buying program to keep struggling countries' funding costs in check or further cut already-low interest rates. Read more. (Subscription required.)