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(Reuters) - Spain's bad bank is generating a lot of interest among foreign investors, an economy ministry source said, and the government will meet with five investment banks on Monday to start the search for private capital.

The bad bank could go ahead with just domestic participation but non-resident investors would give the vehicle credibility, the source said on Friday. Talks with domestic investors were ongoing, and the government hopes to meet five investment banks as of Monday in the search of private interest, the source added.

Spain has set up a bad bank to siphon off toxic real estate assets dating from a 2008 property crash from balance sheets as a condition of receiving up to 100 billion euros ($127 billion) of aid in a European bail-out of the sector. The Spanish government expects to apply for between 35 billion and 40 billion euros of that aid.

The reduced final bill takes into account the transfer of assets to the bad bank, capital raising operations, such as Popular's 2.5 billion euros capital increase, and the forced losses on holders of hybrid and junior debtholders. A source involved in the negotiations said on Friday that Bankia's junior debt holders will likely take a loss of less than 50 percent

The bad bank, known as Sareb, is due to be up and running by the end of November and will have a maximum asset value of 90 billion euros. It will initially receive assets from four state-rescued banks, including Bankia, worth 45 billion euros.
The bad bank will have an initial equity tranche of 3.9 billion euros. Around 800 million euros of that will be capital and 3.1 billion euros will be subordinated debt.

In a second stage, after including the assets of a further group of lenders in need of public aid who will be forced to transfer assets, the total volume could be worth around 60 billion euros over time and the equity tranche could go up to 5 billion euros.

"In the end our objective is that international lenders will have to invest around 500 million euros of pure capital," the source said.

The rest of the bad bank will be financed by senior state-backed bonds with an average maturity of 1.9 years priced at Euribor plus 200 basis points, according to the source. These can be used as collateral with the European Central Bank to get liquidity.