This paper focusses on the financial relations between the banking sector and the Treasury in Modern Spain. Tax systems have been insufficient, generating a chronic budget deficit. This drove to irresponsible public debt management, being the State a serial defaulter until 1987. This prevented the budget deficits could be financed by sovereign debt issued on the stock exchanges, and forced the state to resort to banks (public and private). The new series of public debt banks portfolios evolution is explained by their pursuit of returns and by changes in banking regulation and financial repression, which favoured the banking status quo. The paper analyses the causes of banking regulation, derived from the public borrowing policy and also from the banking lobbying strategy. It examines the consequences of the deadly banking-state embrace which brought about the interconnection between fiscal and banking crises.