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Spanish Banks Need Up To 62bn Euro Bailout

(c) Sky News 2012

The Spanish government has announced that up to 62bn euro will be needed to recapitalise its struggling banks.

A figure of 100bn euro has already been pledged by eurozone leaders.

The audit of their balance sheets was carried out by two independent consulting firms, Oliver Wyman and Roland Berger.

Earlier this month, Spain's government asked the EU for money to help prop up its beleaguered financial sector.

There will be a further, more detailed audit of the state of the banks, which is due to be published at the end of July. This will look at the declining value of many of the banks' assets.

In the past few years, the banks acquired a lot of property from customers who defaulted with loans, and the value of that real estate has dropped by a quarter and is expected to fall further.

It has led to analysts predicting the true cost of recapitalising the banks could be three or four times Thursday's figures.

Despite concerns about the state of the Spanish economy, there was stronger than expected demand from investors in the latest fundraising debt auction from the country's Treasury.

Some 2.2bn euro was raised, though it had to pay much higher interest rates than previous auctions because of fears that a full-scale bailout might still be required.

The Treasury sold 602m euro in five-year bonds at an average interest rate of 6.07%, up from 5.4% in the last such auction on June.

It sold 918m euros (£738.9m) in three-year bonds at 5.46%, up from 4.3%, and 699m euro (£562.7m) in two-year bonds.

Overall, demand was between three and four times the amount on offer.

Prime Minister Mariano Rajoy will meet his French, German and Italian counterparts on Friday in Rome to discuss the details of the financial package, including what conditions may be attached. Mr Rajoy has steadfastly refused to call the measures a "bailout".

But because the money will go to the banks via the government, it will count as a loan, increase the sovereign debt, and the costs of repaying the cash will rise.

If the government cannot get the bailout money back from the banks, it will be saddled with the losses.

All this is happening at a time of recession and an unemployment rate of 24%.

If the loan does not come with some austerity strings attached then the Greek, Irish and Portuguese governments may be tempted to renegotiate the terms of their bailouts, which came with conditions.