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Spain Bailout Package of $77 Billion Will Not be Enough

The Spain bailout package has a steep price, but still might not be enough to save the country's banking sector.

Spanish economy minister Luis de Guindos formally asked Eurozone partners for up to 62 billion euros ($77.4 billion) to recapitalize his country's ailing domestic banks. The financial institutions are weighed down by bad loans to property and construction companies, and by an ongoing Eurozone debt crisis.

In a letter to the Luxembourg Prime Minister Jean Claude Juncker, who serves as head of the 17-nation Eurozone finance ministers, Guindos explained he wanted to settle on details and conditions of the loan before the next euro group meeting on July 9.

Juncker acknowledged receipt of the letter and said that the ministers expect to give a go-ahead to the European Commission, the European Central Bank and the European Banking Authority to negotiate terms of the bailout.

The request was anticipated after the results of two independent audits were released last week. Financial consultants Oliver Wyman and Roland Berger made the first step in a two-part audit of the Spanish banking system.

Wyman found that worst-case scenario, Spain's banking sector would need a bailout package of between 51 billion euros ($63.6 billion) and 62 billion euros ($77.4 billion). Berger estimated on the lower end with 51.8 billion euros ($64.6 billion).

The formal request for a Spain bailout has made investors more nervous, and is driving the bond yields higher, making it increasingly likely Spain will need more money to try and resolve its debt crisis.

The Spain Bailout Package Concerns

The ambiguity swirling around Spanish banks has heightened concerns that the country's struggles will lead to a bailout akin to those given to Greece, Ireland and Portugal.

Also weighing on investors' minds is how Spain's situation will impact Italy. The dread is that bailing out Spain will deplete the Eurozone's emergency resources and leave Italy vulnerable should it need bailout relief.

The EU's top economic official Olli Rehn commented Monday that he had instructed his staff to "step up their work" on assessing the Spanish banking sector.

Rehn added that while mandates on the bailout loan would only apply to "banks being recapitalized and to the Spanish financial sector as a whole," the EU would continue to keep a close eye on Madrid's assurance of fiscal and economic reform.

Rehn wrote in a statement, "There cannot be sustainable growth without sustainable public finances, both at national and sub-national levels. Progress in these areas will be closely and regularly reviewed in parallel to the financial assistance."

The EU Summit to do Little

European shares slid, the euro fell sharply and U.S. stocks fell Monday following Spain's proper appeal for aid.

Looking ahead, investors don't expect much from policy makers at this week's European summit, since few effective measures have yet to be implemented.

"EU leaders have waited for so long to implement any changes that the situation is almost out of control and affecting nations across the world," Ion-Marc Valahu, a fund manager at Clairinvest in Geneva told Reuters.

Data released last Thursday underscored just how the debt dilemma plaguing Europe is a drag on world economic growth.

"Macroeconomic data has been weakening for the past few months and Spain is still having difficulty financing its deficits at economic levels," Tocqueville Finance fund manager Don Fitzgerald told Reuters. "I would not expect a miracle from the EU summit. Any moves will be very evolutionary in nature at best. "

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