Spain’s biggest seven banks need 68 billion euros ($88 billion) of additional capital as a buffer against bad loans and to meet regulatory requirements, according to Royal Bank of Scotland Group Plc.
“Not only only do banks need to raise more provisions against 323 billion euros of real estate exposure, but insolvencies are rising steadily on other loans too,” Alberto Gallo, the bank’s head of European credit strategy, wrote in a note.
Using public money to fund the lenders may “result in a vicious circle of austerity,” Gallo said, which could create higher unemployment and increase insolvency rates.
Spain should follow the Swedish bad bank model used in the 1990s, he wrote. That would mean sharing the burden of recapitalisations with private investors and allowing bondholder losses on non-viable banks.