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Will Spain seek an international bailout?

(MoneyWatch) Amid the reports and denials about a bailout deal for Spain's banks, it is easy to lose sight of the nation's much larger problem which has yet to be addressed: The Spanish government's debt. The nation's regional governments owe a total of $175 billion and can no longer afford to borrow on the international bond markets.

Reuters is reporting that Madrid will request a European Union bailout on Saturday, while the BBC is reporting denials of this from officials across the EU. Whichever one of these is right, there is no doubt that most of Spain's banks are in desperate need of recapitalization.

The IMF is expected to release a report Monday saying they need $90 billion to recapitalize, $50 billion of which would have to be foreign aid. However, analysts at Fitch Ratings released a report yesterday saying that Spain needs $126 billion to recapitalize, roughly $86 billion of which would have to come from abroad. This is a huge increase from Fitch's previous total estimate of $37 billion.

The bank crisis came to a head two weeks ago when Bankia announced it would need a $24 billion bailout. Earlier on that same day Catalonia, Spain's most prosperous region, said it could no longer afford to borrow money and also needed support from the national government.

Catalonia represents about one fifth of the Spanish economy and has more than $16.46 billion in debt to refinance this year. Last month investors started demanding more than 8 percent interest in order to lend the region money. Greece, Portugal and Ireland all sought international bailouts when their interest rates went over 7 percent. On May 28, the interest rate on Spain's 10-year bonds hit 6.6 percent. Although it came down since then, it is once again increasing.

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Last Friday the national and regional governments made a big show of promising to pay all their debts. "Spain's central government and the regions have paid and will pay religiously the interest and the principal on their debts," said Andreu Mas-Colell, secretary of the economy for the Catalonia regional government. While the intent is undoubtedly there, the money to do it is likely harder to find.

Officials have floated the idea of "hispabonds," bonds that would raise cash for the regions and have the central government's guarantee, which would help bring down borrowing costs and give the regions greater access to capital markets. This assumes that investors will have more faith in the central government's ability to repay these debts.

Although Spain held a successful bond auction yesterday - selling $2.5 billion worth - the interest rate on its benchmark 10-year bond was 6.044 percent, the most since Nov. 17 when the yield in the secondary market reached a euro-era record 6.78 percent. There has been speculation that some of that debt may have been purchased yesterday by other governments in an effort to keep the interest rate from rising.

Spain's total government debt is currently 63.4 percent of GDP, well below the EU average of 82.5 percent. This is fantastic when compared to the EU's other troubled economies: It is almost 100 percentage points below Greece's and 30 to 40 percentage points below that of either Ireland or Portugal.

Despite this, Fitch cut Spain's credit rating on Thursday three notches to BBB - the same rating as Kazakhastan. Fitch said this was because it expected total government debt to hit 95 percent of GDP in 2015. A large reason for that: "The credit and funding profile of regional governments."