Spanish Banks Need More Money

If you listen carefully, you can practically hear the whole of Germany moan. It was revealed on Tuesday that may need yet more money if the economy continues to deteriorate.

That news came from Miguel Angel Fernandez Ordonez, the head of the central bank, though concerns were already rising that some Spanish banks may not survive a recession, especially if it is made worse by the government's austerity drive.

It is a terrible time to be a Spanish leader. Following the massive bailout(s) that Greece, Portugal and Ireland have already been forced to take from the rest of the euro zone, Spain had to implement austerity measures to avoid a similar fate. They really had no choice. But, as Greece is finding out, you're damned if you do, damned if you don't. Austerity measures will be unpopular with the Spanish people, but deemed necessary by Europe. No austerity measures could result in stunted aid in the future. Of course, the main aim of the Spanish government is to avoid a bailout altogether.

Lenders in Spain were wounded by the 2008 property crash, and a surge in loan defaults has put them in the eye of the euro zone again, and some analysts are predicting that a bailout will be necessary sooner rather than later. Spain continues to rule that out.

Ordonez said at a Madrid conference that a reform might solve the bank's problems in the short term, but the idea of more capital will continue to raise its head.

"If the Spanish economy finally recovers, what has been done will be enough, but if the economy worsens more than expected, it will be necessary to continue increasing and improving capital as necessary in order to have solid entities," he said.

The banking sector in Spain has been weighed down with debt wince that 2008 housing collapse and it is currently in the process of a third wave of consolidation which, is successful, will cut the number of players to 12 or less from roughly 40.

The most recent reform, introduced in February, had to aim of convincing banks to put aside 50 billion euros in order to mop up real estate losses. Borrowing costs have gone up since, with the markets questioning whether this move, a short term fix at best, will work.

Spanish Prime Minister Mariano Rajoy remains positive, and he recently announced 10 billion euros in new health and education services, as he aims to persuade potential investors that Spain can hit its targets for deficit reduction.

By Brett Callwood