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MADRID (Reuters) - Spain may say on Wednesday how it will plug a hole of at least 8 billion euros ($10.21 billion) at Bankia, part of an effort to clean up a banking sector laden with bad debts and stop the country sinking further into the euro zone debt crisis.
Economists say Spain has little hope of emerging from recession unless there is a wide-ranging bank recapitalization and many predict it will need an international aid package similar to the ones handed out to Greece and Ireland.
Spain says it does not need outside money and government sources told Reuters on Tuesday it would outline a rescue for the country's fourth largest lender, formed from the merger of seven banks during an earlier unsuccessful restructuring.
The government has just picked Goldman Sachs to value Bankia and consultancies Oliver Wyman and Roland Berger were hired to audit other banks' loan books, damaged by a property crash that helped push bad loans to their highest in 18 years.
Economy Minister de Guindos is expected to give details on the government's plans for Bankia in parliament at 1600 GMT but economists said the focus was on the banking sector as a whole.
"The market has moved beyond Bankia. How much Bankia will get in aid is not going to make a big difference," said Martin van Vliet, senior economist at ING.
"The question is now about the long-term solvency of parts of Spain's banking system, especially what is going to happen with mortgage loan default. This concern is not being addressed."
A leading banking industry group, the Institute of International Finance (IIF), has said Spain's banks could need another 76 billion euros to cover losses as bad debts might rise as high as 260 billion euros.
Bankia needs to find about 7.5 billion euros by the year-end to meet government demands to cushion itself against real estate losses. It also needs to raise about 1.3 billion euros by June to meet strict European Banking Authority capital rules.
Spain last week converted 4.5 billion euros of state loans to parent company BFA (Banco Financiero y de Ahorros) into equity, giving it a majority stake in Bankia and partly nationalizing the lender.
One source said de Guindos was likely to announce the final taxpayer's bill of Bankia's rescue. He has estimated the state will put less than 15 billion euros into the latest of the four Spanish bank rescues in recent years.
A second source said talks on the size and form of the bailout - through loans, equity or cash injection - were being held between the economy ministry, the Bank of Spain, Bankia and Goldman Sachs.
Financial markets are closely watching the developments in the banking sector to see whether Spain will become the next casualty in the debt crisis that started in Greece. Four of Greece's largest banks got an 18 billion euro recapitalization on Tuesday.
Spanish bond yields were trading at 6.16 percent on Wednesday, not far off 7 percent, the level that is seen as unsustainable for a country's finances. Bankia's shares were little changed at 1.73 euros, against a blue-chip Spanish index 2 percent lower.
The appointment of outside auditors, as well as U.S. bank Goldman Sachs on Bankia, has been seen as an effort to reassure investors and European Union leaders, who will meet at a summit on Wednesday, that Spain has the situation under control.
Banking sources questioned whether these external consultants could wring more information from lenders than has already been given to institutions like the International Monetary Fund and the central bank.
One banker said the appointment of external auditors indicated a lack of trust in the central bank.
"The Bank of Spain has a great team, they could always hire some accountants. I don't understand why the government agreed to outside auditors. It seems as if people don't trust the central bank," said one investment banker in Madrid.
There have also been questions about the size of the fees the companies would earn while the government is cutting spending to improve its finances.
However, advisers who have worked on other government bank restructurings said fees for Goldman Sachs would likely be lower than for other deals, with most firms agreeing to do such work for the prestige and in the hope that it brings new business.
Several financial and government sources told Reuters last week that the strategy of the Spanish authorities would be to clean up, downsize and sell Bankia within three years.
That plan could however derail if the several capital gaps identified in the accounts by the lender's auditor Deloitte were too large, the sources said.
Additional reporting by Julien Toyer and Sonya Dowsett; Editing by Anna Willard