Spain's Bankia SA is set to ask the state for a more than 15 billion euros ($19 billion) bailout on Friday, marking another rise in the cost of a drawn-out rescue of the country's fourth-biggest bank.
The capital shortfall at Bankia is key to a wider funding gap in Spain's banking system, which some investors believe could drive the euro zone's fourth-largest economy to seek international aid - a move that would create fresh uncertainty around the whole currency union.
Spain is nationalizing Bankia, which holds some 10 percent of the country's bank deposits, after it was unable to handle heavy losses from a 2008 property crash. The government insists the bank is a one-off case.
One London-based analyst said the government's handling of Bankia had undermined confidence in whether the figure announced would be enough. "Whatever they say, people are going to think it's not enough. The process has been going on for so long already."
Earlier this week Economy Minister Luis de Guindos told a congressional committee that the state would have to put at least 9 billion euros into Bankia to cover losses on sour loans and repossessed housing.
The government has already spent 4.5 billion euros to prop up Bankia and the entire rescue is now seen totaling some 20 billion euros. De Guindos had pledged in the past that no public money would be put into the banks.
Bankia's new management team is analyzing the financial position of the banks before approving a recapitalization plan at a board meeting to be held on Friday afternoon. The extra cash relates to accounting glitches and writedowns on future losses across the balance sheet, a financial sector source said.
Spain will have to go to the markets to raise debt to put into Bankia at a time when its borrowing costs are high.
Spain's country risk, as measured by the spread between benchmark German and Spanish bond yields, jumped as high as 500 basis points in recent weeks. On Friday it had moderated to 462 basis points as investors moved out of German debt to hunt for higher returns.
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.
A Treasury source told Reuters on Thursday that adjustments to 2011 town hall accounts could mean another change, up or down, to the overall public deficit last year, which stands at 8.9 percent of gross domestic product (GDP), almost 3 percentage points higher than the target.
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.
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.
Ratings agency S&P could cut the credit rating of some Spanish banks on Friday, Banesto said in a research note. The agency said in April that by the end of May it would conclude a review of Spanish banks on creditwatch.
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.
(Additional reporting by Tracy Rucinski; Editing by David Holmes)
By Carlos Ruano and Sonya Dowsett