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Financial troubles at a big Spanish bank and one of the country's richest regions, Catalonia, piled on problems on Friday for the Madrid government and for investors who question whether it can pay its debts without help from euro zone allies.
Bankia SA, Spain's fourth biggest bank and newly nationalized, asked for a bailout of 19 billion euros ($24 billion US) to repair losses caused by a burst property bubble, a financial sector source said - more than double what the finance minister said just days ago would be the least that was needed.
And the president of Catalonia, one of the wealthiest of Spain's 17 regions, said high interest rates demanded by wary creditors were making it hard for his administration in Barcelona to raise funds.
He called on the central government in Madrid to guarantee joint bonds issued by regional authorities or otherwise underwrite regional financing: "We don't care how they do it," Artur Mas told reporters, saying the Spanish economy would not grow if the regions struggle to pay monthly bills to suppliers.
Investors believe the banks' capital shortfall and a credit crunch for regional governments could force the euro zone's fourth-largest economy to seek international aid - a move that would throw further doubt on the future of the currency union.
Adding to a miserable day for Spanish investors, Standard & Poor's lowered its ratings on the debt of Bankia and four other banks and said it was taking a dimmer view of Spain's economy:
"Spain is entering a double-dip recession that will likely trigger a large increase in the volume of problematic assets that the financial system will accumulate in 2012 and 2013, which in turn will lead banks record high credit provisions."
BANKIA NEEDS RISE
After Bankia's new management team analyzed the financial position of the bank at a board meeting, a financial sector source said it would ask for state aid of 19 billion euros.
Earlier this week, Economy Minister Luis de Guindos, who once pledged that no public money would be used to bail out banks, told a congressional committee only that the state would have to put at least 9 billion euros into Bankia.
The government has already spent 4.5 billion euros to prop up Bankia. De Guindos had pledged in the past that no public money would be put into the banks.
One London-based analyst said the government's handling of Bankia had undermined confidence in whether the figure announced would cover losses. "Whatever they say, people are going to think it's not enough," said the analyst, who spoke on condition of anonymity. "The process has been going on for so long."
Spain is nationalizing the bank, which holds some ten percent of the country's total deposits, after it was unable to handle heavy losses from a 2008 property crash.
The government insists that Bankia's woes do not reflect the wider financial system in Spain.
Spain will have to go to the markets to raise debt to put into Bankia at a time when its borrowing costs are high.
Spanish banks, flush with cheap liquidity from the Central Bank in the first part of the year, increased their holdings of domestic government debt in April while foreign investors have cut their holdings.
Catalan leader Mas's comment helped to drive the euro currency to a 22-month low. Spain's country risk, as measured by the spread between German and Spanish bonds jumped to 495 basis points from around 460.
Treasury Minister Cristobal Montoro has pledged to come up with a way to back regional debt by July. On Friday, Deputy Prime Minister Soraya Saenz de Santamaria said the central government was still looking at options.
"These are complicated mechanisms that must be analyzed," Saenz de Santamaria said at a weekly news conference.
The government was implementing measures to make it faster and cheaper for people to start up small businesses as Spain tries to meet European demands to make its economy more competitive, she said.
The regions have 36 billion euros of debt maturing this year and have been priced out of international bond markets. Catalonia's debt rating has been cut by S&P credit rating agency to one notch above junk.
Mas said Catalonia's options for refinancing were central government bonds or debt guarantees, high-priced short-term bank debt or the limited market for selling patriot bonds to Catalonian residents.
While struggling to put a precise number on a banking sector clean-up, Spain has also revised up its 2011 deficit figure several times as additional spending from regional and local governments has come to light.
The conservative government of Prime Minister Mariano Rajoy plans more than 45 billion euros in savings this year to try to bring the deficit down to 5.3 percent of GDP, a mission many say is impossible.
Spain has gone through four different stages of rescues of its banks, none of which has completely convinced investors that the clean-up has been deep enough.
Now it may end up creating one nationalized bank out of its failed lenders, including Bankia, if the state cannot find buyers for state-rescued banks like mid-sized Catalunya Caixa.
Two sources close to the situation said that the FROB bank restructuring fund, which has taken over several banks to resell them, was considering delaying the auction of Catalunya Caixa and smaller savings bank Banco de Valencia.
Under pressure from the European Union, the government has hired independent auditors to produce a report on the financial system. International institutions such as the European Central Bank and International Monetary Fund will scrutinize the audit to give it credibility.
Bankia shares have fallen 34 percent since its former Chairman Rodrigo Rato stepped down on May 7, in a prelude to the state intervention in the bank. The shares were suspended pending the announcement later on Friday.