More stress for Spanish banks

Two banks are set to go public this week in Spain in a crucial test for the nation's troubled financial sector.

NEW YORK (CNNMoney) -- The stress for Spain could just be getting started after several of the nation's banks failed to pass stress tests Friday.

The European Banking Authority tested 90 financial institutions across Europe to see if they have enough capital to survive a crisis. Of the eight that did not pass, five were based in Spain.

The results come as two big Spanish banks, Bankia and Banca Civica, are expected to hold initial public offerings this week. Both banks passed the test, with core capital ratios above the minimum 5%.

"The key issue is whether the stress tests will affect the IPOs, which will be essential for the banks to recapitalize themselves," said Antonio Barroso, an analyst at the Eurasia Group in London.

Bankia, which combines the operations of seven regional savings banks, is set to debut July 22 on the Bolsa de Madrid, according to Spanish regulatory filings. Bankia's smaller rival Banca Civica is scheduled to list on July 21.

But Bloomberg and The Wall Street Journal both reported that Bankia cut its offering price Monday morning due to the continued problems in Europe. Shares of European banks were under pressure Monday as investors digested the outcome of the stress tests.

The EBA examined the banks' exposure to bonds issued by troubled sovereign nations, but it did not consider what would happen if those bonds lost value.

Banco Santander (STD), BNP Paribas (BNP) and Barclays (BCS) were lower in early trading Monday.

The stakes are high for the Spanish government, which could be forced to prop up the banks up if private investors shun the offerings.

In April, the Spanish central bank approved a law requiring banks to have a core capital ratio of 8%. If banks fail to raise enough capital to meet the requirement, the government's bailout mechanism may be forced to make up the difference.

Spain created the Fund for the Orderly Restructuring of the Banking Sector, FROB, in 2009 to help stabilize the nation's banks after its housing market crashed.

The fund has a capacity of up to 99 billion euros, but only 9 billion euros has been pre-funded, said Barroso.

"The government told the banks that if they want government support, they're going to be nationalized," he said. "But the government doesn't have the money."

It's time for a European TARP

That means the FROB could have to issue more bonds if Bankia or Banco Civil cannot recapitalize themselves with private money. The fund has seen strong demand for its issues in the past. An offering of 1.75 billion euros worth of 5-year debt in July was oversubscribed.

In a statement, the Spanish central bank said the stress test results demonstrate that the nation's banks do not need any additional capital beyond what the government has already provided.

"The stress test shows that no Spanish bank needs to further increase its capital thanks to the loss-absorbing mechanisms specific to the Spanish financial system," the statement read.

However, the five banks that failed the stress tests -- Catalunyacaixa, CAM, Pastor, Unnim, and Caja3 -- are still woefully under capitalized.

Spain, the fourth largest economy in the euro zone, is struggling with a 20% unemployment rate and its housing market remains weak. But the Spanish government remains committed to enacting reforms and the public appears wiling to accept them, said Barroso.

Investors have been wary of European sovereign debt as the crisis in Greece, Ireland and Portugal appears to be spreading to core members of the European Union, including Spain and Italy.

The Spanish government is scheduled to offer bonds later this week, with interest rates rising to record levels Monday. The spike in borrowing costs could make it harder for Spain to raise money to fund its operations.

"Spreads in the market have been so volatile," said Barroso. "Based on the last few weeks, you can't say it's safe."