Like Ireland before it, there is no chance that Spain's banks need only 40 billion or even 80 billion euros to maintain their current book capital levels if they recognize all the losses on their balance sheet.
We are talking about a country that had an enormous real estate bubble and now has an unemployment rate exceeding 24%. The losses in the banking system are far, far greater than 80 billion euros.
The IIF estimated the losses at over 200 billion euros. Moody's has estimated the losses are closer to 400 billion euros.
Regular readers know that a modern banking system is designed so that governments do not have to bailout the banks. With deposit guarantees and access to central bank funding, the banks can continue to operate and support the real economy even while they are rebuilding their book capital level from the negative balance that would result from realizing all the losses currently hidden on and off their balance sheets.
Based on the IIF estimates of both losses in the banking system and the speed at which Spanish banks generate capital, it will take the banks 4 years to rebuild their book capital levels. If the actual losses turn out to be closer to the Moody's estimate, we are talking 7-8 years to rebuild their book capital.
In either case, the time for banks to rebuild their book capital without being bailed out is completely manageable.
German and European Union officials are working on plans, it has emerged, to inject cash into the stricken sector, perhaps using the bail-out funds, the EFSF and ESM.
Officials in Brussels said the contingency strategy to support Spain could be "austerity-lite", rather than tied with conditions like the Greek and Portuguese bail-outs, to restore confidence more quickly. The bail out could be as much as €80bn(£65bn) rather than €40bn Madrid reckons its banks need.
Mario Draghi, president of the European Central Bank (ECB), said the ESM's current treaty "forbids direct recapitisation of the banks", but a shift in political rhetoric injected hope into fraught financial markets.