It’s going to take more than €20bn

SPAIN is running out of time to rescue its ailing banking sector. That’s why we expected economy minister Elena Salgado to come up with a recapitalisation plan that went the whole hog.

But the €20bn package outlined late on Monday night is simply too small: it is little wonder that Spanish banks fell across the board yesterday, as investors digested the government’s mealy-mouthed policy response.

Analysts at RBS reckon the real cost of recapitalising the Spanish banks is around €50bn, on top of the €14bn already committed by the state-backed Fund for Orderly Bank Restructuring (FROB).

For Spain’s domestic-only banks, the situation looks dire. Based on the assumption that the banks will be stressed according to the parameters set by the 2009 US Federal Reserve test, RBS says that Banesto needs an extra €5.7bn to withstand a financial shock in 2011.

That is a staggering 127 per cent of its market capitalisation. Bankinter needs €2.7bn (117 per cent of its market cap); Popular €7bn (110 per cent); and Sabadell €5.3bn (102 per cent).

Things are markedly better for the more diversified banks, Santander and BBVA, which need an extra €17bn and €10.4bn respectively – less than a quarter of their market cap.

Of course, these estimates show just how inept the Spanish government’s plan is, even if it does go some way towards higher capital levels in the banking sector. Investors should sell off Spanish banks while they can.