The bursting in 2008 of a real estate bubble that powered the economy for more than a decade has saddled banks, particularly Spain's savings banks or 'cajas', with enormous amounts of bad loans. The country's central bank, the Bank of Spain, says the sector is still burdened with about â¿¬175 billion ($230 billion) in "problematic" real estate holdings. There are concerns that, as Spain's shrinking economy takes its toll on the banks, the government and possibly international lenders will be forced to step in and rescue the banks.
The government has already been pushing the lenders to strengthen their finances by merging and has introduced rules that require banks to set aside an estimated total of â¿¬50 billion ($65.7 billion) more in provisions by the end of the 2012 to cover their toxic real estate assets.
Spain's economic problems have become the focus of Europe's debt crisis as investors worry over Spain's ability to push through austerity measures and reforms at a time of recession and an unemployment rate hitting 24 per cent â¿¿ or 50 per cent for those aged under 25. Late last week, S&P downgraded the country's credit rating by two notches from A to BBB+, citing a worsening budget deficit, worries over the banking system, and poor economic prospects.
The austerity measures are aimed principally at slashing the government's deficit from 8.5 percent of economic output to the maximum level set by the European Union of 3 percent by 2013. For this year the goal is 5.3 percent.With the economy shrinking, there are concerns that the government will not meet its targets and will be forced to seek a bailout. The National Statistics Institute on Monday said that compared to the first quarter of 2011, the economy shrank 0.4 percent. The Bank of Spain last week said the economy had shrunk 0.4 percent on the quarter. The statistics institute's findings are taken as the official figures.