MADRID, Spain – Spain is under increasing pressure to find a quick way to save its troubled banking sector from collapse.

Politicians and investors around Europe are worried that the recession-hit country will not find the money to cover the toxic property loans weighing its banks down. The expectation now is that Spain’s government will have no choice but to seek an international bailout to help it bolster its lenders.

The concerns have sent Spain’s borrowing costs on the international bond markets to worrying levels — close to the points where most market-watchers say a country cannot maintain its debt. Spain, previously rated A, may need as much as (euro) 100 billion ($11 trillion) to bolster its banking system, compared with an earlier estimate of about (euro) 30 billion, US credit rating agency Fitch said yesterday. Fitch went on to downgrade the country to BBB, two notches above junk, and warned that the country faced further downgrades. In its most recent debt auction Thursday Spain managed to raise (euro) 2 billion — but at much higher rates than in previous bond sales.

Spain’s financial problems are not due to Greek-style government overspending, but because its banks got caught up in the collapse of a property bubble.

Following Spain’s entry into the euro — and joining currency forces with more stable economies such as Germany — the country’s banks gained unprecedented access to international loans at rock-bottom rates, which they passed on to their customers.

Spanish construction firms, property speculators and homebuyers snapped up the cash in expectation that the housing boom would go on forever. And the government did nothing to slow or regulate the manic building as it collected a tax bonanza and record budget surpluses.

In 2008 the real estate bubble that supercharged the economy for more than a decade burst. Banks, particularly Spain’s savings banks or ‘cajas’, have been saddled with enormous amounts of bad loans. As the second recession in three years hits Spain with more economic gloom predicted, the amount of bad loans are expected to surge while plunging house prices will lower the value of the huge stock of repossessed homes the banks already own. Making matters worse, Spain’s unemployment has risen to nearly 25 per cent — making it increasingly difficult for many Spaniards to pay their mortgages.

The country’s central bank, the Bank of Spain, says the sector is still burdened with about (euro) 175 billion in “problematic” real estate holdings.

While Portugal and Greece got bailouts because of high public debt, Spain’s debt stood at a relatively low 68.5 percent of its gross domestic product at the end of 2011, and is predicted to hit 78 per cent by the end of the year. That higher figure would still be lower than the 2011 debt percentage of GDP of countries like Italy, Belgium, France and even Germany.

Spain’s trillion-euro economy is much larger than the three countries that have already received bailouts, making its problems much more worrisome for European leaders. Bailing out Spain itself would likely stretch the eurozone’s finances to the breaking point because the Spanish economy is the fourth largest in the 17-country eurozone, behind Germany, France and Italy.

A full-blown Spanish bailout including its public finances would hurt growth in Europe, the United States and Asia by creating losses and fear among banks, which are key to the functioning of the global economy, and by hurting trade. Many U.S. companies get a sizeable part of their sales and profits from Europe so a recession there would impact companies and economies around the world. Even U.S. mutual funds have an average 3.6 percent of their assets invested in European stocks.

Because many European governments are already overburdened with debts, rescuing their failed banks risks bankrupting some of them. The banks, in turn, own huge amounts of their governments’ bonds. The result is that any fall in confidence in either the banks or the government tends to create a downward spiral requiring more foreign financial aid.

The fear is that once Spain is forced into a bailout, other countries such as Italy would follow suit, adding further pressure on the eurozone.

Spain has so far failed to set out a clear roadmap on how its banks — in particular Bankia — will be saved. At first, government officials floated an idea of injecting government debt into the lender so that the bank itself could go to the European Central Bank using the bonds as collateral to receive recapitalisation cash. European leaders ruled out that option.

Spain also said it could fund the bank bailout by selling more debt on international markets. But the interest rate investors force Spain to pay on 10-year bonds shot up to 6.7 per cent, matching a record high and perilously close to the seven per cent level that forced Greece, Ireland and Portugal to accept bailouts and harsh conditions on government finances. While Spain passed a key market test Thursday by selling bonds with 6 percent interest, the cost to shell out those sort of returns over the long-term are prohibitively high.

Spain would like to get European aid for its banks but is reluctant to ask for it because under current rules the aid would have to be given to the government. That would allow Brussels to dictate policies to Madrid, something the Spanish government is keen to avoid. It would also further hit investor confidence, sending interest rates on its bonds even higher — and into bailout territory.

Spain is trying to convince European leaders — and especially the eurozone’s paymaster Germany — to let it have a “light” form of a bailout without directly asking for it. EU leaders last July approved a measure allowing the continent’s bailout funds to lend money to recapitalize banks in countries not already receiving bailouts — such as Spain.

The money would have to be funneled through the Spain’s government. But because the money is meant to help troubled financial institutions rather than the government, the conditions attached to the bailout loan would not have to be as over-arching as those attached to government bailouts, such as in Greece and Ireland. However, the country in question would be ultimately responsible for repaying the loan, and would have to show that its economic policies are sound enough to allow it do to that.