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Spain's banks may need $190 billion

(MoneyWatch) Spanish interest rates broke the critical 7 percent barrier amid reports that the nation's banks will need more than the $125 billion bailout loan the European Union pledged earlier this month to cover their bad debts.

Spain's central bank said in a report on Monday that souring property and other loans held by the nation's banks were at an 18-year high. In April, 8.72 percent of bank loans, worth $192 billion, were more than three months overdue for repayment, up from 8.37 percent in March.

An independent audit of Spain's banks commissioned by the government is supposed to be released sometime this week. Spanish business daily El Confidencial reported today that the banks could need up to $190 billion in funds, more than double the $75 billion figure the government hinted at last week.

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Spain's 10-year bond rates closed today 7.1 percent. The governments of Greece, Ireland, and Portugal all sought international bailouts within weeks of their bonds hitting 7 percent. That level has become an indicator that the nation has lost the confidence of financial markets and that the banks within that nation can no longer buy enough bonds to keep interest rates from spiking.

Jon Carmel of Carmel Asset Management found that real estate composed 79 percent of all Spanish household assets. As a proportion of household wealth, that is 50 percent more than what is common in other European countries, double the level in the U.K. and triple that in the U.S. This is one reason why Spain's economy is likely in much worse condition than even international investors assume, according to the study (which was first reported at the Big Picture blog). Carmel concludes that:

  • Spain's national debt is 50 percent greater than the headline numbers. Although the nation's debt-to-GDP is usually reported at 60 percent, that balloons to 90 percent if you add in regional and other debts.
  • Spain's housing prices will fall by an additional 35; during the real estate bubble, Spain built one house for every additional person added to the population during the past two decades.
  • Spain has many "zombie" banks with massive loans to developers and homeowners that have little chance of ever being repaid. As a result, Spain's banks have not begun to realize losses and are vastly undercapitalized.

If so, that suggests the EU has been trying to solve the wrong problem for much of the financial crisis. Europe's leaders have generally viewed the problem as one of liquidity, in which otherwise healthy banks are temporarily short of cash because interbank lending had dried up. But Spain's woes increasingly look like a problem of solvency, in which the country's banks are insolvent.