Reports by two independent auditing firms have concluded that €51 billion-€62 billion will be required to recapitalize Spain’s banks sufficiently to withstand losses expected over the next few years. The IMF had earlier estimated a need for €37 billion. The country’s government will use the estimates to determine how much aid to request.

The amount is well below the €100 billion that Spain had initially said would be needed to bail out the country’s banks, and that other Eurozone nations had indicated they were prepared to lend. The two reports conducted stress tests on 14 Spanish banking groups, including Santander (NYSE: SAN) and BBVA (NYSE: BBVA).

Commercial and residential real estate top the list of problems facing Spanish banks. In one auditor’s base and adverse scenarios, the total expected loss for 2012-2014 comes in at €253 billion-€274 billion, of which the banks are forecast to make provision for €98 billion, add another €6 billion-€7 billion in asset protection schemes, generate new profits of €64 billion-€68 billion, and to maintain an excess capital buffer of €33 billion-€39 billion. The capital deficit ranges from €51 billion-€62 billion for the base and adverse cases, respectively.

The terms under which Spain would get the loans are also at issue. The hope that the European Central Bank would issue eurobonds is certainly dead. The hope that Germany would allow the European Financial Stability Fund to offer the loans appears to be dead as well. Right now, the best the ECB seems able to come up with is a relaxation of collateral requirements that would allow Spain’s banks to borrow from the ECB using asset-backed securities as collateral.

In conjunction with the relaxed collateral rules, the ECB is also considering dropping altogether the use of external ratings by firms such as S&P, Moody’s, and Fitch Ratings when the central bank makes its lending decisions on funds backed by sovereign bonds.

The auditors’ reports and other information from Spain’s central bank is available here.

Paul Ausick

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