Spain to demand banks recognize more losses

Spain will demand banks set aside another 45 billion dollars against loans to the ailing building sector, financial sources said, raising the possibility more public cash will be needed to rescue the country's lenders.

The government and banks are belatedly recognizing a multi-billion funding gap in the financial system linked to a 2008 property crash that has heightened fears the country may need an international bailout.

Lenders, already trying to write down 54 billion euros of losses on bad property investments, are unlikely to be able to find the extra funds without public help. Some also doubt whether the additional provisioning will be enough.

"There's no way we can meet these provisions by ourselves - the whole sector would fall into losses," said a source at one savings bank who declined to be named.

The demands - which another source said could be between 20 and 40 billion euros - are set to be announced after a weekly cabinet meeting on Friday and will form part of a wider banking reform which will include an estimated 10 billion euro injection of public cash into troubled lender Bankia (BKIA.MC).

The Economy Ministry declined to comment.

"The banking issue has been allowed to fester for three years. More public cash will raise funding costs for the government but it's worth the risk," said Gilles Moec, an analyst at Deutsche Bank.

Spain's banks have around 300 billion euros in total exposure to the building sector, including property seized as collateral, equivalent to around 30 percent of the country's gross domestic product. Of that about 60 percent is problematic.

Spain is suffering its second recession in three years and has the highest unemployment rate in the European Union at 24.4 percent, pushing more Spanish businesses and individuals to default on their debt.

The government recognizes some banks will not be able to make the new provisions but is still working on a plan for those cases, a government source said.

The premium investors demand to hold Spanish over German debt rose to its highest level since November on Wednesday, up around 18 basis points from the close on Tuesday to 450 bps..