Investors Run Scared of Spain's Battered Banks

04-11-2012 • http://www.cnbc.com, By: Reuters

The government has ruled out more state aid for a sector that comprises a motley mix of international lenders and heavily indebted local savings banks. That leaves two options: raising private capital or turning to the EU for bailout funds.

Prospects for a private sector solution are poor. Nothing on the horizon looks likely to persuade foreign fund managers to invest, such is the fear of the banks' growing bad loans, their holdings of shaky sovereign debt and the worsening economy.

Already battered by a property market crash that began four years ago and continues unabated, few Spanish banks are able to borrow funds on wholesale credit markets and the majority are instead relying on the European Central Bank

"Most are currently on liquidity life support from the ECB but asset quality continues to deteriorate as house prices keep falling and unemployment is still rising," said Georg Grodzki, head of credit research at Legal & General Investment Management.