Europe has been recently been rocked by problems in Spain’s Banking sector as Spain’s central bank was forced to seize a Priest led  Bank “CajaSur” which was running huge losses.Spain has been facing increasing internal stresses led by a burst of the housing bubble and 20% employment.Its weak “Cajas” which are socially run banks are adding more pressure to the fragile financial sector.These banks have incompetent management and dodgy accountability ostensibly doling out profits to social groups like the Catholic Church.Spain has been trying to solve the problem by merging the weaker Cajas with stronger ones . However this has been opposed by Labor Unions which fear Job Cuts and Branch pruning.Not that it would solve any solvency problems as the macro condition in Spain continues to deteriorate due to slow growth,housing price weakness, fiscal deficits and an eye popping 20% employment.Also the merging of the Cajas could backfire by bringing down the stronger banks just like the merger of Merill Lynch almost brought Bank of America to the brink of bankruptcy.Just like the Fed,Spain’s central bank will have to act as lender of last resort.

BBVA which is regarded as a well run bank with strong international operations is facing difficulties in getting short term funding in the US commercial paper market according to WSJ.This is a classic contagion effect with even stronger players paying for the sins of weaker and incompetent companies.It is not a surprise that investors would be wary of lending to any Spanish bank even if it is one of the stronger ones.

Spain Rush to Repair Savings Banks Risks Leaving Job Half Done  – Bloomberg

Spain is pushing for mergers between “cajas,” lenders run as foundations that helped fund the country’s property boom and account for about half of its loans. By melding ailing lenders with stronger partners, the central bank aims to purge bad loans and lay the groundwork for economic recovery as the government tackles its budget deficit. Lumping lenders together without reducing staff and closing branches isn’t likely to accomplish those aims, Lecubarri said.

The four-way combination announced on May 24 would create the fifth-biggest banking group in Spain by assets, with 2,300 offices and 14,000 employees. The cajas chose to be required to monitor solvency and liquidity centrally, under a single management. Their brands, local branch networks and spending on social programs would remain independent.The deal, which would involve an injection of cash from the rescue fund, hasn’t been signed off by regulators. To tap the fund, the banks may have to agree to additional restructuring measures.The Bank of Spain has approved the model for such mergers, dubbed “cold fusions” by the Spanish press. A central bank spokesman declined to comment.

BBVA Pares Gains After WSJ Says Bank Unable to Renew Funding – Bloomberg

Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest bank, pared gains after the Wall Street Journal reported the lender was unable to renew about $1 billion of short-term funding.The Bilbao, Spain-based lender hasn’t been able to renew the funding in the U.S. commercial paper market this month, according to the newspaper. The bank still has substantial European-based funding and deposits and about $9 billion in U.S. commercial paper, the newspaper said today.