Spain is stepped up it efforts to save the country’s troubled banks with a plan to make them recognise the huge losses from the bursting of the property bubble.
The government of Prime Minister Mariano Rajoy is expected to reveal full details on Friday, but financial sources said the lenders will be told to put aside another 35 billion euros to cover bad loans.
That is on top of the 54 billion euro financial cushion already demanded in reforms announced in February.
Spain’s banks have close to 300 billion euros in total exposure to the building sector, including property seized as collateral. That is equivalent to around 30 percent of the country’s gross domestic product.
Repayment is unlikely of at least 184 billion euros worth of those loans.
Meanwhile shares in Spain’s fourth largest lender, Bankia, fell further on Wednesday ahead of the expected announcement of a 10 billion euro government bailout for the bank. It holds 10 percent of the Spanish banking system’s deposits and is the most exposed to toxic assets.
Previously Prime Minister Rajoy had said he would not put more public money into rescuing the banks but he has had to do a U-turn.
Uncertainty over the final cost of a rescue meant Spanish government bond yields broke through the psychologically important six percent level, which is considered unaffordable over the long term.
Investors have yet to be convinced as this will be the fourth banking sector overhaul in three years.
As some Spanish lenders are unlikely to be able to find the extra funds without public help, there is an increased probability that the Madrid government may have to issue more debt to bail them out.
Ben Levett, an analyst at consultancy 4Cast said: “It depends what’s announced, but right now it feels like smoke and mirrors and not the cathartic moment that Spain needs. It looks more like the government has panicked and pushed something out.”