Spain's surging bad loans are spurring doubt on whether thegovernment can persuade investors that it can clean up thecountry's banks without further damaging public finances.

Non-performing loans as a proportion of total lending jumped to8.16 percent in February, the highest level since 1994, from lessthan 1 percent in 2007, according to Bank of Spain data publishedtoday. The ratio rose from 7.91 percent in January as 3.8 billioneuros of loans soured in February, a 110 percent increase from thesame month a year ago. That takes the total credit in the economythat the regulator lists as “doubtful” to 143.8 billion euros.

Defaults are rising and credit is shrinking at a record pace as24 percent unemployment corrodes the quality of loans built up inthe country's credit boom and saps the appetite of banks to makenew ones. Doubts about the extent of Spain's non-performing loansproblem is hurting bank stocks and driving up the government'sborrowing costs on investor concern that the expense of propping upailing lenders may add to the debt burden.

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