The Spanish government has pushed lenders to strengthen their finances by merging, and has told banks to set aside an additional €84 billion by the end of 2012 to cover soured real estate assets. Spain's two largest banks — Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA — are expected to meet the stiffer requirements. But investors are fearful that some smaller banks won't be able to.
WHERE COULD THE BAILOUT MONEY COME FROM?
Spain has yet to map out how its banks — in particular Bankia — will be saved.
Spain could finance a bank bailout by selling bonds. But it's reluctant to take on a huge amount of debt when the interest rate investors would demand is perilously close to the 7 percent level that forced Greece, Ireland and Portugal to seek bailouts. That could turn Spain's banking crisis into a government-debt crisis, which so far it has been able to avoid.
Spain would like to get European aid for its banks but is reluctant to ask for it because under current rules the aid would have to be funneled through the government. That would also increase the country's public debt load and potentially send interest rates on its bonds higher.
Spain is trying to convince European leaders to let it have a "light" form of a bailout without directly asking for it. It hopes to find a little wiggle room in a measure approved by European Union leaders last July. That measure allows the EU to lend money for the purpose of recapitalizing banks in countries not already receiving bailouts.
The rules say the money would have to be funneled through the government. However, the conditions attached to the bailout would not have to be as over-arching as those attached to government bailouts, such as in Greece and Ireland.
"There is talk on the start of different solutions, but there's still nothing concrete," said Antonio Barroso, an analyst with the Eurasia Group political risk consulting group.
Associated Press writers Daniel Woolls, Ciaran Giles, David McHugh and Shawn Pogatchnik contributed from Madrid, Berlin and Dublin.
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