The weaker banks, or "cajas", must raise Tier 1 core capital to 10pc by September if they depend on wholesale capital markets for more than a fifth of their funding or if less than a fifth of their shares are in private hands. If they fail to do so, the government will seize control through the state bailout fund (FROB).
The demands are even tougher than the broad-brush plans unveiled last month and shows the determination of the authorites to cut out any cancers rather than allowing the sort of drift that bedevilled Japan in the 1990s.
The move comes after yields on Portuguese 10-year bonds punched to a post-EMU high of 7.66pc, renewing fears of a spill-over into Spain. The European Central Bank intervened on Thursday to restore calm but it is clear that Euroland euphoria over Chinese purchases of Portuguese debt has not lasted long.
Jose Manuel Campa, Spain’s economy secretary and the architect of the financial overhaul, acknowledged that the most vulnerable cajas are unlikely to find private investors. "It will be a challenge. They have not taken part in the equity markets for some time," he told The Telegraph.
Only five of the 17 cajas meet the 10pc rule. Caixa Nova is 6.0, Unnim is 6.22, Caixa Galicia 6.43 and Catalyunia Caixa 6.6. Even the giant Caja Madrid with €328bn (£277bn) of assets has core capital of just 7.1, though it is already preparing a stock listing.
Mr Campa is hopeful that cajas will be able to raise "a big chunk" from investors given the strides made in cleaning up their books. He said fresh capital of €20bn will be enough to restore the caja industry to health, disputing claims by City analysts that €40bn to €80bn will be needed. "These high numbers are based on very stretched scenarios, with a fall in house prices by 50pc and land prices by 70pc," he said.
Madrid is basing its estimates on bank stress tests last July that included a severe double-dip recession, with a 3pc fall in GDP over the two years of 2010 and 2011. Since the economy in fact contracted by just 0.1pc last year, it would take a dire relapse at this point to exhaust the safety buffer.
However, there is a risk that Spain may have missed a chance once again to "get ahead" of the crisis. A report this week by the world’s Financial Stability Board (FSB) said the sheer scale of Spain’s property bubble had overwhlemed the country's seemingly tough rules on loss provisions.
While the FSB praised Spain’s latest efforts to strengthen its banking system, there was a sting in the tail. "Such determined actions became necessary partly because of the delay in addressing earlier the structural weaknesses of savings banks," it said.
The Spanish media reports that the cajas have yet to come clean on €80bn of exposure to property loans, and are under fresh scrutiny by central bank inspectors.
Mr Campa blamed the renewed eruption of the bond crisis last Autumn on Franco-German talk of haircuts for holders of EMU sovereign debt, coupled with the failure of the Irish authorities to carry out rigorous stress tests of their banks. "That really hurt us. We had made huge efforts to be transparent, but the Irish crisis devalued the quality of the tests for everybody."
The fate of the cajas is inseparable from the Spanish property market. Mr Campa said construction has fallen from 700,000 homes year during the bubble to around 200,000 until well into the next decade, helping to clear an overhang of properties estimated by consultants RR de Acuna to be as high as 1m.
The uber-bubbles were in the Madrid suburbs and parts of the tourist belt on the coast, but the market is much closer to balance in the rest of the country.
Mr Campa, a free market economist who taught at New York’s Stern School of Business with arch-bear Nouriel Roubini, was brought in to restore Spain’s credibility in world finance after the crisis was in full swing.
He advises astute investors that right now may prove to be the optimal moment to buy a house in Spain. "The Germans are coming back. We need the English, too," he said.
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