The full extent of the huge problems facing Spain’s banks is becoming embarrassingly clear while the sovereign debt market continues to punish recession-hit Spain, making it still more difficult for the government to raise money to bail them out. Bank recapitalizations could amount to as much as €100 billion ($124 billion), according to some analysts. On May 30 the yield on Spain’s 10-year bond climbed a further 21 basis points to 6.66 percent, close to the 7 percent level which is widely regarded as unsustainable, before falling back on the afternoon of May 31 to 6.45 percent, even as Spain’s Economy Minister Luis de Guindos insisted the government would foot the growing bill for the banks. Both he and the European Central Bank denied rumors that the latter would indirectly help to fund a recapitalization of Bankia, the country’s fourth-biggest bank by assets.

Spain’s banks will have write down many more billions of euros of their loans to the real estate sector, according to a senior Spanish expert on the market. So far Spain’s banks have identified €184 billion of “problem” and nonperforming loans in their total exposure to real estate developers of €307 billion. But Mikel Echavarren, chairman of the Madrid-based real estate advisory firm Irea says, “It’s impossible that €120 billion of the loans to real estate developers are performing. We estimate, based on our work with more than 80 corporations, that perhaps €40 or €50 billion are performing loans.” He says, “The Bank of Spain’s rules on valuing real estate loans are flawed.” Banks are asked to assess the value of the “collateral” — the land or the buildings — without reference to the actual ability of the developers to repay the loans at a time when there are few buyers for that collateral. Nor have “problem” loans in the banks’ total private sector loan book of €1.8 trillion been properly assessed, he says. As Oliver Burrows, senior credit analyst at Rabobank in London, says, “There has been a lack of transparency throughout. Ireland admitted its problems at a much earlier stage.”

And market conditions are deteriorating steadily as the government struggles to cut its budget deficit from 8.9 percent of GDP in 2011 down to below 3 percent by 2013. GDP is expected by the European Union to contract by 1.8 percent this year, and by 0.3 percent in 2013. There is very little prospect of the outlook improving, least of all in real estate. Echavarren says, “In our refinancing advisory work, we see very little new money going in. Real estate companies are simply selling collateral to the banks or asking for extra time that will not solve their problems.”