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Madrid - Spain seems condemned to pay for its own banking rescue after Germany flatly refused to let the eurozone's future bank supervisor do so, analysts say.
That is bad news for Spain's soaring public debt.
But it is only one of a series of concerns now emerging from a eurozone bailout of Spain's banks, which have been bogged down with bad loans since a 2008 property crash, diplomatic sources and analysts say.
Madrid had battled for a eurozone banking supervisor to be allowed to pump capital directly into its weak banks as part of a planned banking union for the 17-member single currency bloc.
That would have relieved Spain of the need to pay back an estimated €40bn it plans to use from a €100bn eurozone credit line.
But German Chancellor Angela Merkel, who faces general elections next year, left no room for doubt about her position on direct recapitalisation for banks that have already been bailed out.
"There will not be a retroactive direct recapitalisation," she said on Friday after a European Union summit, which agreed to work on setting up a eurozone banking union with supervisory powers during 2013.
A French government source said the question of direct aid for Spain's banks was not settled.
But after the EU summit, a European diplomat was clear: "Spanish banks won't be recapitalised before the end of 2013, probably in 2014."
That would leave Spain holding the bill for the rescue loan, which was agreed with the eurozone in June and signed in July.
"Spain is going to ask for about €40bn from the liquidity line," said Daniel Pingarron, analyst at Spanish brokerage IG Markets. "That means the Spanish public debt grows automatically."
In fact, Spain's 2013 budget already takes into account a payment of €30bn for the banking fix, pushing the level of public debt to 90.5% of gross domestic product from an expected 85.3% this year.
But the banking rescue is also running into other serious problems, analysts say.
Another European diplomatic source said Madrid was balking at the eurozone's insistence that investors in stricken banks' subordinated debt and preference shares take losses before any bailout.
'There's a stalemate'
This is particularly sensitive in Spain where the banks sold billions of euros in preference shares to ordinary customers, many of whom believed the complex instruments were a form of savings.
"There is a stalemate here," said Edward Hugh, an economist based in Barcelona.
Prime Minister Mariano Rajoy's conservative government and the eurozone authorities were at odds over the preference shares because of Madrid's reluctance to force the bank clients to lose their savings, he said.
At the same time, the two sides seemed to be struggling over the implementation of a "bad bank", created to mop up the bad assets held by commercial banks and then to sell them to investors, he said.
Latest data show more than one in 10 Spanish bank loans has gone bad, a new record.
The Spanish bad bank is set to launch on November 19 under the name of SAREB with a formal ceiling of €90bn in so-called toxic assets, an economy ministry official said.
But the key unresolved question is how to value the bad assets.
The lower the price, the easier it is to attract investors. But a low price also could push up bank losses and force the Spanish government to pump in yet more money.
With the cost of the bailout being added to Spanish debt under the existing accords, Madrid is trying to handle the bailout "on a shoestring," Hugh said.
"Europe is pressing them obviously for a lower price and is pressing them to do the preference shares but Spain seems to telling them to go and walk," the analyst said.
In any case, Hugh said, the final cost of the banking bailout is likely to rise.
"At some stage there is obviously going to be more," he said.
Indeed, Moody's Investors Service estimated this month that the Spanish banks would require between €70bn and €105bn.
If the cost of the banking bailout was €40bn, or four percent of Spanish GDP, then Spain may be able to handle it, Hugh said. But more capital eventually will be needed, he warned.
"The story has not ended yet."
