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Ay caramba! While everyone was busy keeping tabs on developments regarding Greece’s bailout deal, Spanish banks managed to convince EU policymakers to give them some moolah for recapitalization.

A total of 37 billion EUR will be awarded to three nationalized banks, in hopes that it would be a start to a long-term clean-up in the country’s financial system.

But of course, as with everything else in this world, the deal comes at a steep price in the form of budget cuts and decreased balance sheets.

For example, Bankia has agreed to cut payrolls by more than 6,000, close down around 1,000 branches, stop real-estate lending, and refocus on retail banking. Analysts estimate that all these measures would translate to a 19 billion EUR loss for Spain’s largest bank! Que terrible!

To help restore confidence in the country’s financial system, the government will set up a “bad bank” to which rescued lenders would pass their toxic retail assets to.

By 2015, it has been agreed that a total of 50 billion EUR worth of bad assets would have already been removed from Bankia’s balance sheet.

It is estimated that the assets of rescued banks would be reduced by 60% in 2017. Policymakers are keeping their fingers crossed that this would somehow reduce market risks.

Along with Bankia, Novagalicia Banco and Catalunya Banc would benefit from the recapitalization fund. All three banks started off as small savings banks but later on got lured to pursue profits and capitalize on Spain’s real estate boom. Of course, when the country’s real estate market tanked, the three banks followed suit.

In order to help prop up these distressed banks, the EU gave them access to a 100 billion EUR credit line earlier this year. It took them a while to tap the fund because shareholders didn’t want to take losses.

Oh, how the tides have changed now! Shareholders have realized that they have no other choice. Burden-sharing will have to be implemented wherein the rescued banks’ shareholders, bond investors and even retail clients would have to take losses. The exercise is estimated to save 10 billion EUR of taxpayers’ money.

One of the major concerns surrounding this whole deal though, is that it could force Spain to lay off more employees as banks cut down their work forces. Considering that the country already suffers from a ridiculously high unemployment rate of 25.02%, its highest since 1976, Spain can’t exactly afford to lose more jobs.

Moreover, many fear that this could worsen its credit crunch. Spanish lending is already declining at a rate of 5% a year, and it’s severely limiting the country’s growth potential.

Bear in mind that the banks lined up for restructuring have credit portfolios that add up to about 40% of Spain’s GDP, so rapid restructuring could choke off a huge amount of credit and deal some serious damage to the economy.

However, there is a way to limit the negative impact on the Spanish economy, and that is for the Spanish government to swallow its pride and ask for a bailout.

Right now, the Spanish government is getting along by having its domestic banks buy its debt, as foreign investors refuse to buy Spanish bonds. But in turn, this has led to less available funding for the Spanish private sector.

But if Spain were to just bite the bullet and ask for financial aid, it would free up money for the banks to lend to the private sector. And that might just be what the country needs to get its recovery back on track.