Spain's ailing banks threaten country's finances

By Alan Clendenning

Associated Press

Published: Friday, June 8 2012 9:34 a.m. MDT

A demonstrator holds a banner reading in spanish "Bankia is a wild animal" during a demonstration next to a Bankia bank branch in Barcelona, Spain, Saturday June 2, 2012. Spain will stick to harsh austerity measures until it emerges from financial crisis, the prime minister said Saturday, promising that the country would survive the present economic turmoil.

Emilio Morenatti, Associated Press

MADRID — Spain is under increasing pressure to find a lifeline for its deeply troubled banks.

Politicians across Europe and investors around the world are worried that the recession-hit country can't come up with the money needed to save its banks without bankrupting the government. Expectations are rising that Spain's leaders will decide in the coming weeks to seek an international bailout for banks crumbling under the weight of bad real estate loans.

As Spain's leaders struggle for a solution to their banking crisis, the country's borrowing costs have soared close to the level that forced the governments of Greece, Portugal and Ireland to seek financial rescues.

The government has yet to put a price-tag on the bank rescue but estimates range from €40 billion ($49.87 billion) to as much as €100 billion ($126 billion).

Here are some questions and answers about Spain's banking crisis:

WHY DO SPANISH BANKS NEED A BAILOUT?

Spain's financial problems are not due to Greek-style government over-spending. The country's banks got caught up in the collapse of a real estate bubble.

Spain's banks, particularly its savings banks or "cajas," have enormous amounts of bad loans. And as the second recession in three years hits Spain, the number of bad loans is expected to surge. Spain's unemployment has risen to nearly 25 percent, making it increasingly difficult for many Spaniards to pay their mortgages.

The country's central bank, the Bank of Spain, says banks are still burdened with about €184 billion ($231 billion) in "problematic" real estate holdings, including loans and repossessed homes.

Spain's government debt stood at a relatively low 68.5 percent of its gross domestic product at the end of 2011. It is predicted to hit 78 percent by the end of the year. But even that higher figure would still be below the 2011 debt-to-GDP ratios of countries like Italy, Belgium, France and even Germany.

SO WHY IS SPAIN'S BANKING CRISIS SO WORRISOME TO EVERYONE ELSE?

Spain is the fourth-largest economy in the 17-country eurozone, behind Germany, France and Italy. Its economy is nearly five times bigger than Greece's, making its financial and economic problems much more worrisome for leaders in Europe.

The rising cost of rescuing failed banks risks bankrupting the Spanish government. And since Spanish banks own huge amounts of their country's debt, any threat to the government's finances could boomerang back to the banks and make them even weaker.

A widening recession and financial crisis in one of Europe's largest economies would drag down neighboring countries and hurt companies and investors around the world.

An international bailout of Spanish banks could relieve some of the pressure on the Spanish government, and decrease anxieties across Europe and the rest of the world.

HOW MUCH WILL IT COST TO BAIL OUT SPAIN'S BANKS?

Bankia S.A., the country's most stricken lender, announced last month that it needed €19 billion ($23.63 billion) in government aid. Spain only has €5 billion left in a fund that it established in 2009 to help banks. The government has promised to help Bankia but has not mapped out a plan.

At least four other Spanish banks also need help.

The overall cost of bailing out Spain's troubled banks is somewhere between €40 billion and €100 billion. The International Monetary Fund is scheduled to weigh in with an evaluation of Spain's banking industry Monday. And the Spanish government has commissioned independent audits to determine the banks' recapitalization needs.

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