Will Spanish Banks Bring Down Spain

On what was to be a quiet trading day, with little news flow, Spanish debt has once again caught market attention. Once again, Bankia is getting headlines while its share values plummet. Bankia revealed that it had a negative value of 4.148 billion euro ($5.5 billion) and its parent group BFA 10.444 billion euro, the state-backed Fund for Orderly Bank Restructuring, or FROB, said in a statement. The valuations are a key piece in the recapitalization of the banking system, weighed down by massive bad loans accumulated in a property bubble that burst in 2008.

In June the Eurogroup Ministers agreed to lend up to 100 billion euro to finance the repair work to the banks. They set strict conditions on the rescue loan including the creation of a bad bank to absorb the industry’s stricken assets at a discount and try to sell them at a profit. The idea is to free up Spain’s banks to lend again, breathing new life into the recession-hit economy. Even though the EU said it would consider loaning up to 100 billion euro the figure after massive audits came to what the Spanish government said was 39billion euro.

Spain officially asked €39.5bn of eurozone funds to recapitalize its debt ridden banks, while its prime minister held back from ruling out a bail-out for the state also. Spain’s economy ministry said it had requested the disbursement of €39.5bn (£32bn) of European funds for its banking sector, as agreed under a June rescue deal. The money represents €37bn for its four nationalized banks – Bankia, Cataluña Banc, NCG Banco and Banco de Valencia – and €2.5bn for a so-called “bad bank”. It should be paid to the state’s banking fund by mid-December, the ministry said.

Despite the bail-out for its stricken banking sector, Spain faces speculation that it will require a sovereign rescue also. So far, its Prime Minister Mariano Rajoy has resisted making a decision on that count, although in an interview over the weekend he did not rule out the possibility of a rescue by the European Central Bank. Recent rumors were that the Spanish government would ask for a formal bailout during the first quarter of 2013.

Spain is facing growing discontent over its austerity drive, however. The weekend saw thousands of disabled people march in Madrid against benefit cuts. A recent survey showed 85%of Spaniards have little faith in Mr. Rajoy, whose government on Friday broke a campaign promise when it said it would no longer raise pensions in line with inflation.

Meanwhile, a Spanish tax amnesty was on Monday revealed to have raised only about half of what was intended at €1.2bn, undermining attempts to reduce the government’s budget deficit.

The questions that markets face, is how much will Spanish banks require and how much more will Spain require and can the eurozone afford this kind of massive bailout.