Although Spanish banks have been found mired in a grim bad loan problem, the Spanish government remains reluctant to accept European rescue funds.
With growing fears that Athens might withdraw from the eurozone, Spain, dogged by worsened economic performance, the troubled banking system and an alarming unemployment rate, is seen as the most susceptible to financial turbulence in Greece.
The Bank of Spain, the country's central bank, announced Friday that the bad loans on the books of Spanish banks, 16 of which were downgraded by credit rating firm Moody's on Thursday, had hit an 18-year high, fueled by news of broke construction companies and a 24.4 percent jobless rate.
According to official figures published by the bank, uncollectible loans reached 148 billion euros (189.2 billion U.S. dollars) last year, marking a 33 percent rise.
The shaky economic situation has prompted the Spanish government to take measures to protect the country's banks against the risks caused by loans going bad.
According to the latest measures announced by Deputy Prime Minister Soraya Saenz de Santamaria and Economy Minister Luis de Guindos, Spanish banks will have to find an extra 30 billion euros (39 billion U.S. dollars) in capital.
The extra capital will have to be raised by the banks themselves or from government loans for which an interest of 10 percent will be charged.
Earlier this year, the government obliged Spanish banks to find 54 billion euros (70.2 billion dollars) in extra capital as a cushion against bad loans.
De Guindos said the decision was taken to restore confidence and credibility in Spain's financial system. The move came just two days after the government nationalized 45 percent of Bankia, the country's fourth biggest bank.
Meanwhile, according to the central bank's data, foreign investors have already begun to withdraw their money. Some 31 billion euros (39.6 billion U.S. dollars) were withdrawn in March.
According to estimates of Danish investment bank Saxo Bank, if the losses of the Spanish banking industry exceeded 20 percent, 300 billion to 380 billion euros (382.7 billion to 484.7 billion dollars) would be needed, which would account for 30 percent to 40 percent of the GDP.
Also on Friday, Spanish Prime Minister Mariano Rajoy revised the country's 2011 budget deficit upwards to 8.9 percent of the total GDP.
The adjustment, the second of its kind, came after four of Spain's 17 semi-autonomous regions confirmed they had spent more than previously forecast.
Spain's debt in all the 17 regions amounts to 140 billion euros (177.5 billion U.S. dollars), accounting for 13.1 of the country's GDP. The huge regional and local debt is seen as a fundamental problem the Spanish government has to address in settling its budget deficit.
Rajoy said on Sunday the latest move showed his government's willingness to be transparent with public accounts.
The Spanish economy further slowed down by 0.3 percent in the first quarter of this year, according to official data released by the the National Statistics Institute (INE).
Declining domestic demand, including household consumption and public expenditure, had undermined economic growth, as the region's fourth largest economy is struggling to put its financial house in order, the INE said in a statement.
While in the United States for a Group of eight (G8) summit, newly-inaugurated French President Francois Hollande said on Friday that Spain's banks should be recapitalized via the mechanisms of European solidarity.
"It would surely be desirable that there is a recapitalization and it would surely be necessary that this recapitalization can be done with the European solidarity mechanisms," Hollande told the press after meeting his U.S. counterpart Barack Obama on the sidelines of the summit.
In response, Rajoy, after arriving in Chicago Sunday for a NATO summit, said Hollande "does not know the state of Spanish banks."
As a matter of fact, as recently as last month, Rajoy had on two occasions denied that Spain would need a bailout from the European Union.
Madrid believes that using Europe's bailout money would lead to years of difficulty in financing for its banks. It also hopes the EU could extend the deadline for deficit reduction, and that the European Central Bank would offer low-interest-rate loans to Spanish banks./.