Spain's banks, virtually blocked out of wholesale credit markets, increased their reliance on cheap loans from the European Central Bank in March, borrowing almost double what they did in February.
The financial institutions borrowed a record €316.3 billion from the ECB in March, according to data which knocked European bank share prices and deepened worries about Spain as the next weak spot in the euro zone debt crisis.
The Bank of Spain's figures, compared with February borrowings of €169.8 billion, sent the cost of insuring Spanish debt against default to a record high and came just before Spain tests market appetite for its debt next week.
The ECB has supplied euro zone banks with around €1 trillion of cheap, three-year loans in two tranches in December and February, a lifeline for battered Spanish lenders struggling to find short-term financing.
However, while the ECB's liquidity boost has proved an invaluable lifeline for Spain's banks, it could be only a temporary fix to a deeper problem of heavy property liabilities and fading confidence, economists said.
"Funding conditions have improved on the back of the unlimited liquidity provided by the ECB, but not all that glitters is gold," Exane BNP Paribas said in an investors note.
"Cheap unlimited liquidity can partly solve short-term liquidity issues but relying on the ECB for funding is, in our opinion, a questionable business model that in the long run demands a higher cost of capital."
Meanwhile, Spain needs at least €20 billion to secure the sale of three bailed-out banks and wants the rest of its hard-pressed banking sector to provide the cash to avoid putting more taxpayer money into the industry.
The Bank of Spain, which has already sold four state-rescued banks, has three more left to sell. It started marketing two of these: Banco de Valencia - a small listed bank based on Spain's east coast, and Catalunya Caixa - a mid-sized Catalonian savings bank, yesterday.
But buyers will not be tempted unless they get guarantees to cover future losses from rotten real estate assets left over from Spain's decade-long property boom that ended in 2008.
These should be covered through a deposit guarantee fund, financed by annual contributions from banks, which originally covered retail deposits but now also guarantees other assets.
But the fund is nearly out of cash after providing guarantees against losses for two other bailed out lenders - Caja de Ahorros de Mediterraneo (CAM) and Unnim.
It only has around €2 billion left - not enough to cover the remaining bank sales. The government wants the banks to provide money upfront to replenish the fund but this will be tough.
"The government is trying to make the banks pay for the loss guarantee scheme. Someone would have to put the money in advance and the banks will pay it back over the next eight years or so," said one Madrid-based banker.
Spain's ability to avoid an expensive state rescue for its fragile banking system is key to the country's efforts to keep its debts under control and avert a European bailout.
The country's economic problems are back in the spotlight as investors fear it could be the next trouble spot in the euro zone. Spain is probably already entering its second recession in three years with banks still fighting to rebuild their balance sheets from the 2008 property crash.
The European Commission said on Wednesday that Spain would not need euro zone financial help to recapitalise its banking sector.
The government, the regulator and the banks are looking at ways in which they can frontload capital backed by future annual contributions from the banks, bankers said.
Reuters
