Bad Loans Menace Spain Bank Plan

Surge in non-performing loans calls into question government’ plan to clean up banks.

Spain’s surging bad loans are spurring doubt on whether the government can persuade investors that it can clean up the country’s banks without further damaging public finances.

Non-performing loans as a proportion of total lending jumped to 8.16 percent in February, the highest level since 1994, from less than 1 percent in 2007, according to Bank of Spain data published today. The ratio rose from 7.91 percent in January as 3.8 billion euros of loans soured in February, a 110 percent increase from the same month a year ago. That takes the total credit in the economy that the regulator lists as “doubtful” to 143.8 billion euros.

Bonds Rise

Spanish bonds rose for a second day as the extra yield that investors demand to hold 10-year debt instead of German bunds narrowed to 404.5 basis points from 413.7 basis points yesterday.

Other Loans

Still, Spain’s deteriorating economy means other classes of loans apart from those linked to real estate are also at risk of going sour, Blattner said.

Bankia Concerns

To be sure, investors have better information on the risks facing Spanish banks as the industry has shrunk and the Bank of Spain has made them unveil their real estate exposure, said Nomura’s Quinn.

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