MADRID — Spain is under rising pressure to find a lifeline for its deeply troubled banks.
Politicians in Europe and investors around the world are worried that the recession-hit country can’t come up with the money needed to save its banks without bankrupting the government. Expectations are rising that Spain’s leaders will have to seek an international bailout for banks crumbling under the weight of bad real estate loans.
As Spain’s leaders struggle for a solution to their banking crisis, the country’s borrowing costs have soared close to the level that forced the governments of Greece, Portugal and Ireland to seek financial rescues.
As much as €100 billion ($126 billion) may be needed to bolster Spanish banks, the credit rating agency Fitch said Thursday. Fitch, which had previously said €30 billion was needed, downgraded the country’s debt rating to two notches above junk and warned that further downgrades were possible.
Spain sold €2 billion ($2.52 billion) in bonds Thursday, but had to pay investors much higher rates than in previous bond sales. There is a growing sense that time is running out for Spain’s government and banks to continue muddling through.
And on Thursday, Spanish Prime Minister Mariano Rajoy hosted his counterpart from the Netherlands, one of the 17 countries that uses the euro that would have to approve outside help if Spain can’t save its banks on its own.
Rajoy said this week that Europe “needs to support those that are in difficulty.”
Here are some questions and answers about Spain’s banking crisis:
Why do Spanish banks need a bailout?
Spain’s financial problems are not due to Greek-style government over-spending. The country’s banks got caught up in the collapse of a real estate bubble.
Spain’s banks, particularly its savings banks or “cajas,” have enormous amounts of bad loans. And as the second recession in three years hits Spain, the number of bad loans is expected to surge. Spain’s unemployment has risen to nearly 25 percent, making it increasingly difficult for many Spaniards to pay their mortgages.
The country’s central bank, the Bank of Spain, says banks are still burdened with about €184 billion ($231 billion) in “problematic” real estate holdings, including loans and repossessed homes.
Spain’s government debt stood at a relatively low 68.5 percent of its gross domestic product at the end of 2011. It is predicted to hit 78 percent by the end of the year. But even that higher figure would still be below the 2011 debt-to-GDP ratios of countries like Italy, Belgium, France and even Germany.
So why is Spain’s banking crisis so worrisome to everyone else?