* Fears Spain's bad bank will be too small
* Spain has yet to attract private investors for bad bank
* Spanish taxpayers at risk of further losses
By Laura Noonan
LONDON, Nov 30 (Reuters) - Spanish banks may have thought a dose of Irish medicine would fix them, but they could yet require a harsher cure.
Spain's "bad bank" opened its doors on Friday with a blueprint broadly based on Dublin's National Asset Management Agency (NAMA) and a similar remit: to purge the country's lenders of toxic property assets that left them dangerously short of capital and reliant on European aid.
Just like NAMA, SAREB - as the Spanish version is known - begins life accused both of paying too much for assets that have gone bad, and depressing the property market by acquiring them so cheaply. It has yet to attract private capital.
There is, however, a bigger fear.
"People are worried that this might not be enough," said Max Bruche, senior lecturer in finance with London's Cass Business School and former assistant professor at Madrid's Centro de Estudios Monetarios y Financieros.
While NAMA relieved banks of 74 billion euros of toxic property assets or 13.5 percent of their loan books, SAREB looks set to take less than 8 percent of Spanish banks' total loan books.
Madrid has argued that its banking crisis is on a smaller scale than in Ireland, where all bar one of the country's domestic lenders were nationalised.
Spain's two largest banks, Santander and BBVA , both passed capital stress tests. They, and several other banks, are not transferring assets to SAREB.
But some analysts are unconvinced. Cass's Bruche points out that some lenders managed to avoid the taint of dealing with SAREB by engaging in so-called "zombie lending" - rolling over unsustainable loans so that their books look healthier.
"SAREB is clearly too small, it's a waste of time," said one analyst who covers Spanish banks and asked not to be named because of his bank's Spanish relationships.
Even with its limited size, there are still concerns that SAREB could land Spanish taxpayers with heavy losses if it can't make a return on the banks' bad assets and funnel that back into state coffers.
SAREB will demand a discount of nearly 46 percent on the first tranche of bad loans and 63 percent on foreclosed assets such as building developments gone bad when it starts taking assets from Spain's banks in December.
In Ireland, NAMA applied an average discount of around 57 percent across the banks' bad assets, creating large holes in their balance sheets and hastening the country's 85 billion euros EU-IMF bailout.
Even at that price it paid too much. Ireland's budget watchdog said this year that NAMA's assets were overvalued by a fifth due to the inclusion of 5.6 billion euros in state aid.
The watchdog warned NAMA would struggle to recoup its costs, never mind make a profit, over its 10-year life span.
The Irish agency has had to write down the value of its assets by 2.9 billion euros since it was set up in 2009, meaning that taxpayers may be left with yet another bill for dealing with the crisis.
As painful as the downward spiral in prices has been, NAMA's discounting forced the banks to face up to the scale of their problems.
NAMA's loan-by-loan analysis has convinced markets that there are no nasties still lurking, helping the country's rehabilitation on international bond markets.
"What people have to understand is that it was a point in time valuation," NAMA Chief Executive Brendan McDonagh told Reuters this week of the 57 percent discount originally applied.
"I think the worst of that is now behind us."
Encouraged by officials in Europe and the IMF, who like the NAMA-style model, Spanish bankers and officials, including the head of Spain's bank rescue fund FROB, have met Irish officials in Dublin to learn from their experiences.
Mike Aynsley, the Australian tasked with winding down the former Anglo Irish Bank, travelled to Madrid in late August to meet executives from nationalised lenders Bankia and NovaGalicia Banco.
NAMA assessed each loan individually before deciding on an average discount of 57 percent.
But SAREB will not be able to do the same because it is working on a wider range of bad assets - some property foreclosures worth as little as 100,000 euros and loans with as little as 250,000 outstanding - that would take too long to assess one by one. So it will look at the portfolios as a whole before assigning a value to them.
The fear that SAREB's losses will keep mounting has so far deterred private investors, putting in jeopardy Madrid's aim of getting at least 51 percent of the bad bank's capital from private sources and, under EU rules, keeping it off Spain's national debt.
"One of the concerns we hear is that the Bank of Spain gets to decide the prices, but unfortunately they haven't had a great track record of getting it right these past few years," said Jaime Becerril, analyst with JP Morgan Cazenove.
"If the Spanish banks don't want to invest in the bad bank it's likely to be for good reason."
The Bank of Spain has defended its decision not to go for loan by loan analysis because it was under pressure from Europe and the IMF to put a figure on its banking crisis.
Instead, SAREB has said it will use the results of recent tests by consultants Oliver Wyman as a base with some "adjustments".
Without such indepth analysis from the start, the danger is that SAREB will uncover nasty surprises later.
As crucial as the price SAREB pays will be the price it can achieve for selling the assets.
Real estate consultants estimate that almost two-thirds of the assets SAREB is due to buy will fail to attract investors, at least in the short-term and possibly ever because much of them relate to undeveloped land and half-built developments.
NAMA has a bigger exposure to commercial property and completed projects, which offer better returns, and a large chunk of its portfolio is based in the better-performing British market. So far, NAMA has raised 2.9 billion euros from sales.
"SAREB has very little exposure to commercial property and absolutely nothing outside Spain, which means only a third or a quarter of its assets will be sellable in the short term and the process will take longer," said Rafael Powley, a Madrid-based director of strategic consulting at property consultant Jones Lang LaSalle.
But the size and relative strength of Spanish companies meant the country's potential for recovery was greater, providing a bigger lift to property prices, Powley said.
"Both NAMA and SAREB face huge challenges. I prefer the Spanish economy but right now I'd prefer to be selling the Irish assets."