Spanish Banks Need Up to $79 Billion in Capital

Independent auditors have calculated that Spain's troubled banks could need as much as 62 billion euros ($78.76 billion) in new capital.

Deputy Bank of Spain governor Fernando Restoy noted that this worst-case scenario was far below the 100 billion euro that the 17 countries that use the euro have made available to rescue Spain's banking sector, which is struggling under toxic loans and assets.

Spain will use the figures from the two outside auditors to decide how much to ask the eurozone for.

The bailout estimate came just hours after Spain's medium-term borrowing costs soared to euro-era record levels at an auction.

Euro zone finance ministers were due to discuss later in the day how to channel up to 100 billion euros ($126 billion) in rescue loans to Spanish lenders weighed down by bad loans from a burst property bubble.

But many in the markets see the package as a mere prelude to a full bailout of the Spanish state.

Spain's financial weakness is in focus a week before a European Union summit discusses plans for closer fiscal and banking union in an effort to strengthen the euro's foundations, after bailouts for Greece, Ireland and Portugal failed to end a 2-1/2 year old sovereign debt crisis.

Madrid sold 2.2 billion euros in medium-term bonds, with demand stronger than at last month's auction, but yields on 5-year paper rose to a 15-year high of 6.07 percent, a level regarded by analysts as unaffordable for any prolonged period.

The runaway Spanish yields contrasted with a French medium-term debt auction in which the yield on 5-year benchmark paper hit an all-time low of 1.43 percent as investors sought the relative safety of a core euro zone country seen as backed by Germany.

"The first worry is can they (Spain) fund from the markets? So they raised 2.2 billion versus a 2 billion target, so they can raise the money," said Achilleas Georgolopoulos, a strategist at Lloyds in London.

"Then the (question is), are the yields threatening for the medium term? And yes, clearly they are much higher than the previous auction, which was widely expected. But still they can continue for a few months to fund at these levels."

A formal request for European assistance may only come on Friday when Prime Minister Mariano Rajoy meets German Chancellor Angela Merkel, French President Francois Hollande and Italian Prime Minister Mario Monti in Rome to discuss the future of the 17-nation euro zone.

"No Debt Mutualisation"

The finance ministers will discuss which of the euro zone's rescue funds—the temporary European Financial Stability Fund or the permanent European Stability Mechanism—will lend Spain the money.

This matters to investors because ESM loans would be senior to other Spanish borrowing, meaning private bondholders would face first losses in any debt writedown.

In Berlin, Germany's government and opposition parties reached an agreement on a financial transaction tax and measures to boost growth that will enable parliament to ratify a European fiscal discipline treaty on June 29.

CNBC