Spanish bank bad loans soar, customers on hook in bailout

The ratio of bad loans held by Spanish banks hit a fresh 18-year high in May, figures showed Wednesday, as the eurozone readied a potentially painful bailout for its struggling lenders.

The value of loans considered "doubtful" -- at risk of not being repaid -- hit 155.841 billion euros ($192 billion), equal to 8.95 percent of all loans extended by the banks, figures released by the Bank of Spain showed.

It was the highest level since 1994 and showed how bad loans have risen since the collapse of a real estate boom in 2008, reflecting the deterioration of the country's economy and financial position.

The figure has increased steadily this year, from 8.15 percent in February to 8.37 and 8.72 percent in the subsequent two months, and is likely to climb significantly higher still, said analyst Raj Badiani of IHS Global Insight.

The upturn reflects a decline in banks' loan portfolios due to "even tighter credit conditions alongside ever gloomier households consolidating their debt levels in the face of still deteriorating labour market conditions and the prospect of a prolonged and deep recession," he wrote in a note.

In late 2008, the ratio of bad loans held by banks in Spain was only 3.37 percent, but the bursting of the real-estate bubble revealed a core weakness that has driven Madrid to seek help from eurozone partners.

On June 9, eurozone countries unveiled a plan that would provide up to 100 billion euros to underpin distressed Spanish banks, which are to concentrate their risky loans in a so-called bad bank by November.

Aid for Spanish banks became a top priority after Bankia, the third largest by assets, called in May for a government bailout estimated to cost 23.5 billion euros.

Eurozone finance ministers are to determine on Friday the details of their plan to help the banks, which should lead to the unblocking of 30 billion euros by the end of the month as an emergency reserve.

Spanish Finance Minister Luis de Guindos said Wednesday that ordinary customers who bought investment products based on shares in their banks will have to take a hit as part of the EU rescue deal.

Many Spanish bank customers bought preference shares offered by their banks during the restructuring of the sector from 2009 but many say they were misled over the risks and believed it was just a new way of saving.

Troubled Spanish banks "will have to contribute to their restructuring as much as possible from their own resources," De Guindos said, citing the terms eurozone leaders have set for bailing them out.

"This implies that the costs associated with the restructuring will be born not only by the state but also by those who invested in the bank," he added, including holders of preference shares.

On Monday, the International Monetary Fund highlighted concern about the precarious state of Spanish banks as it forecast that Spain would remain in recession next year.

For 2012, the Spanish government expects economic activity to contract by 1.7 percent.

Badiani forecast that "with the recession now expected to last throughout 2012 and 2013, the bad bank loan ratio is likely to remain on an upward trajectory, and could breach 10 percent by the second half of 2013."

Falling Spanish property prices in particular "would place additional pressure on existing bank loans to the construction sector and property services," he noted.

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