Spain's banks must fill a €59bn (£47bn) hole in their capital cushions caused by a burst of reckless lending to building developers during the country's boom years that has left them awash with toxic real estate assets.
The Spanish government and central bank on Friday revealed the results of an independent report commissioned to work out just how bad the damage is and to identify those banks that will need to be bailed out with eurozone rescue funds.
The report, based on stress tests carried out by consultancy Oliver Wyman, lists seven banks that will certainly need bailout money or must raise further capital themselves by the middle of next year.
Spain's secretary of state for the economy, Fernando Jiménez Latorre, estimated that, over all, Spain's banks would eventually need some €40bn of the €100bn of bailout money on offer to them to cover the bad loans – adding that this marked the beginning of the end of the country's banking crisis.
"With this process capitalisation and restructuring needs will all be met," he said. "All doubts should be dispelled."
But markets remained nervous yesterday amid rumours that Spain's debt rating could be downgraded to junk status after the market closed. France's stock market index fell 1.5% while the German stock market was off 0.7% while US was 0.8% lower. Stocks in London edged 0.3% lower.
Bankia, Spains's fourth-largest lender, topped the list with a hole in its capital needs estimated at €24.7bn. Catalunyabank will need another €10.8bn. In all cases, the hole represented the amount of extra capital the bank would need to survive a significant further turndown in Spain's recession-plagued economy.
Bankia, created by the merger of half a dozen ailing savings banks, is one of several that also sold their own clients complex hybrid preference shares which will now see hundreds of thousands of ordinary Spanish retail investors forced to lose money.
Eurozone authorities have made it clear they will not fill the entire €59bn hole with bailout money, and that part of it must be covered by inflicting losses on the preference shareholders.
That will enrage the small investors, many of whom complain they were sold the shares without understanding what they were by insistent bank managers who cold-called them and claimed that they were as secure as ordinary deposits.
Some put their life's savings into preference shares – and courts are dealing with thousands of cases where banks are accused of conning them into buying the shares. Central bank deputy governor Fernando Restoy said the losses for shareholders would be decided bank by bank.
On Friday an investigating magistrate in Madrid, Javier Gómez Bermúdez, ordered Spain's central bank to hand over information on the behaviour of senior executives of another collapsed savings bank – the Caja de Ahorros del Mediterraneo (CAM), which has since been cleaned up and sold on.
Judge Bermudez wants the bank to say whether senior managers were honest about the amount of toxic real estate they had taken on as well as information on the way their pay was set. He also wants to know whether auditors should have spotted the problems before the bank collapsed.
The Oliver Wyman report cleared most of the country's biggest banks, saying that Santander, BBVA, Caixabank, Sabadell and three others would not need any help.
The figure of €59bn sets the upper limit of the amount of money the banks would need from the rescue fund. Two mergers between the banks affected should lower that to €54bn, with €44bn corresponding to banks that have already been nationalised.
As part of the bailout terms those banks that receive bailout money will offload their toxic real estate onto a so-called "bad bank" which will pay prices well below the value reflected in banks' accounts.
The "bad bank" will sell them off when the real estate market recovers. It has been given up to fifteen years to do that.
With its banks now firmly set on the path to recapitalisation, Spain's government is widely expected to ask for a euro zone bailout for itself.
Rating agency Moody's was expected to issue an evaluation of Spain's creditworthiness shortly, with concerns that the agency will downgrade Spain's government debt to junk status.
Craig Erlam, markets analyst at Alpari, warned that this could "create some panic" among holders of Spanish debt. "The positive side to this is this could accelerate the bailout request," he said.
guardian.co.uk © Guardian News and Media Limited 2010