The Pain In Spain Continues

The decay is starting to accelerate now in Spain's continued banking mess, with Bankia, Spain's biggest mortgage lender, now saying it needs almost 20 billion euros to stay afloat.

The government is trying to head off a collapse of the bank, which could threaten the Spanish banking industry and reverberate through the financial centers of Europe and beyond. The fear is that it will not have the money to save its banks, and their $1.25 trillion in deposits, and will need a rescue by the rest of Europe — even as political and financial leaders struggle to resolve Greece’s debt debacle. 

Bankia’s announcement came as Standard & Poor’s, the credit ratings agency, downgraded Bankia and two other banks, Banco Popular and Bankinter, to junk status and lowered the ratings of two other Spanish banks also staggered by mounting bad loans. A junk rating could make it even harder for Bankia to borrow its way out of trouble. 

The rising fear now is that the recent steady outflow of deposits from Spain’s banks, which are suffering from the bursting of Spain’s real estate bubble, to institutions outside the country could eventually turn into the sort of bank run that almost brought the financial world to its knees after the collapse of Lehman Brothers in 2008. 

Spain’s debt crisis is also playing out on another front. As its banks shudder, heavily indebted regional governments are also running out of money. On Friday, the government of the Catalonia region warned that it might no longer be able to finance its debts and called on the central government for help. While other regions have also sounded budget alarms, Catalonia is the biggest so far; it represents nearly one-fifth of Spain’s economy. 

The acceleration is beginning again, and it's starting to look like another bailout of Spanish banks will be needed just like Greece, Ireland, and Portugal got.   We'll see where it goes, but my guess is things will come to a head pretty soon in Europe.