Primary Spanish lenders are preparing themselves to recapitalize by more than 20 billion euros in order to posess 9% in principal capital reserves. Santander, BBVA, La Caixa and Bankia would have to raise between 4 and 5 billion euros, while Popular would get by with just 1 billion. This figure would increase to 30 billion euros if loans to the Public Administration loans are provisioned, which is a crucial factor to Dexia's decline.
An injection like this will happen after the EU requires lenders to account for debt at a market price, something that will create a lot of uncertainty and tension among investors, particularly if declines continue. EU leaders will attempt to stop the hemorrhaging by taking up guarantees for bank issues once again, a measure that was applied successfully in 2009 and that could put a stop to doubts around the US economy.
Spain will try to raise the bulk of their funds in the real estate sector. The rest will be an extra weight that will impact credit and the recovery. With respect to firewalls that Spain and Italy need in order to keep contagion at bay, the Europeans will continue to look for formulas that avoid the need to raise more funds internally. They will be sought after from the IMF and private sector.
Securing one part of the public debt issues will generate some unknowns and will also compel the ECB to rescue the secondary debt market that will go under. Europe is taking important steps, but has yet to solve a miniscule thing like the Greece crisis that is demanding 60% debt forgiveness and improved decision mechanisms for Europe politics.
