Spain's banks need at least 40 billion euros (about $46 billion) in fresh capital to preserve the country's financial stability, the International Monetary Fund said Friday in an eagerly-awaited report.
An IMF mission visited Spain and conducted "stress tests" on banks. It recommended that considerably more capital be set aside for the country's most vulnerable banks to cover "restructuring costs and reclassification of loans."
The Fund's executive board emphasized late Friday that such tests did not attempt to represent the full scope of capital needs. That could take the total required to between 60 billion and 80 billion euros, according to IMF officials.
The IMF assessment -- roughly in line with that of ratings agency Fitch -- comes on the eve of critical talks between the Spanish government and European institutions over the terms of aid to Spanish banks, which are saddled with bad debt, much of it property-related.
Wade: Spain will eventually need bailout Spain's deputy prime minister, Soraya Saenz de Santamaria, said Friday the government was awaiting the IMF report before taking a decision on its next steps.
Other investment banks have estimated the needs of Spanish banks at in excess of 100 billion euros.
"The extent and persistence of the economic deterioration may imply further bank losses," said Ceyla Pazarbasioglu, head of the IMF team that conducted a recent visit to Spain.
"Full implementation of reforms, as well as establishing a credible public backstop, are critical for preserving financial stability going forward."
The IMF said that while the core of Spain's financial sector is well managed, "important vulnerabilities remain in the system."
Successive Spanish governments have taken action to consolidate banks, creating the fourth largest -- Bankia -- out of a number of failing financial institutions. But late last month, Bankia sought a further 19 billion euros in capital to shore up its balance sheet.
One analyst told CNN that the Spanish authorities had "run out of ammunition" in their efforts to recapitalize banks, with the government's own borrowing costs rising to about 6.5% for the 10-year sovereign bond in recent days. The analyst did not want to be named because of his close connection to the government.
A yield of 7% is widely regarded as unsustainable, and has led other EU states such as Ireland and Portugal to seek European and IMF assistance.
Fitch cut Spain's sovereign credit rating by three notches Thursday.
One issue that has unnerved markets is the difficulty in assessing the strength of Spanish banks because of what the IMF report calls "their differences in management quality and risk management philosophies."
Larger banks such as Banco Santander and BBVA are regarded as sufficiently diversified and robust to avoid further injections of capital.
But the IMF noted that "in recent years, a gradual approach to taking corrective action allowed weak banks to continue to operate to the detriment of financial stability."
The impact of the global financial crisis, which caused a severe recession and soaring unemployment in Spain, exposed weaker banks with large portfolios of bad debt.
But the IMF says "some of the weak entities were merged into larger but still weak ones, while delays in taking corrective action meant that vulnerabilities were not addressed or were allowed to grow."
The governor of the European Central Bank, Mario Draghi, has made similar criticisms in the past week.
Financial analysts say instilling confidence into the Spanish banking system is urgently needed to prevent troubles affecting Greece from spilling over, as markets question the viability of the Eurozone, which has 17 members.