Debt crisis: Spain 'will need extra bail-out'

A bank-by-bank test of financial stability due on Friday is expected to conclude that Spain's lenders are dangerously over-burdened with toxic debts and need to be recapitalised, restructured or shut down.

The stress test is expected to show a dramatic deterioration since the previous tests were carried out at the beginning of the summer which suggested a €60bn cash injection would be the worst-case scenario.

Nomura Global Economics said in a note: "Our initial reaction to the publication of those estimates has been negative. The announced figures are well below the market expectations, which start at around €100bn, and, in our view, not only fall short of bolstering market confidence but may actually increase the risk of Spain losing market access."

Last week, the Bank of Spain said bad debts at Spanish lenders had risen to record levels, with almost one in 10 loans in arrears. It is the highest bad-loan ratio since central bank records began in 1962.

In June, Mariano Rajoy, the Spanish prime minister, negotiated a deal that secured lending from Brussels of up to €100bn to recapitalise the banks. Experts now think that it will not be enough. Amid soaring borrowing costs and a stricken economy, Spain has come under intense pressure to ask Brussels for a full sovereign bail-out.

The request would enable Mario Draghi to unleash the European Central Bank's bond-buying programme, which he unveiled recently but said would not be deployed to help Spain unless Madrid first requested help.

Mr Rajoy has resisted, saying Madrid is not prepared to accept stringent austerity conditions that would accompany a Greek-style bail-out.

But last week, the economic crisis was eclipsed by a potentially explosive fall-out between Madrid and one of its biggest regions, Catalonia. The escalating row, over power and taxes, has led to experts warning of violence and even civil war in Spain.

In a dramatic move, Catalonia's ruling parties sought guidance from Brussels on the legality of secession from Spain, requesting a "route map" for membership of the European Union and the euro as an independent state.

Foreign minister Jose-Manuel Garcia-Margallo responded by calling Catalan secession "illegal and lethal". He warned that Spain would use its veto to stop the region of Catalonia becoming an EU member "indefinitely".

Catalonia's parliament will meet next week to "think deeply" about its next fateful step. Artur Mas, the Catalan leader, said last week: "Catalonia will follow its path. We have no enemies but we will build our own project as a country."