Oct. 2 (Bloomberg) -- Spanish property loan delinquencies may increase as much as 15-fold by the end of 2008 as interest rates rise, Moody's Investors Service said in a report.

Loan-payment arrears by developers and builders may reach 5.5 percent of total property loans from the current 0.37 percent, according to the New York-based ratings company. The increase would mark a ``soft landing'' for Spain's 12-year property boom, Moody's said in a report called ``Spanish Banks and Real Estate.''

After rising 178 percent between 2000 and 2006, more than any other country in Europe, Spanish home prices are being threatened as the highest European Central Bank interest rates in six years curb consumer spending, Moody's said.

``In the Spanish context, I wouldn't call this a soft landing,'' said Charles Dumas, international director at Lombard Street Research Ltd., a consulting firm in London. ``When housing slows down, labor and income will slow down and spending growth will also slow down.''

A surge in loan defaults by Spanish property developers and builders would punish banks and the country's wider economy, whose growth has been driven by the real-estate industry, Dumas said in a telephone interview.

Credit-default swaps on Spanish government debt today rose 1 basis point to 9 basis points, according to Deutsche Bank AG. A basis point on a credit-default swap contract protecting 10 million euros ($14 million) of debt from default for five years is equivalent to 1,000 euros a year. The contracts rise when perceptions of credit quality decline.

Creditor Protection

Grupo Llanera, a Valencia-based developer, said today it's seeking protection from creditors because of rising interest rates and lower demand for property. The company owes about 3 million euros ($4.3 million) to suppliers, a spokesman said last month, declining to be named.

Spanish builders constructed 750,000 houses and apartments last year, more than France and Germany combined, while annual demand runs about 60 percent of that, according to the Finance Ministry.

The country's banks are ``well positioned'' to withstand a decline in real-estate prices, according to Moody's. The lenders are required to set aside provisions for losses under rules introduced in 2000. The capital of Spanish banks is only at risk if delinquency rates go above 5.5 percent, the report said.

``Spanish banks have significantly improved their controls and risk-management systems in recent years,'' analysts Olga Cerqueira and Maria Cabanyes wrote in the report.

Moody's said a ``hard landing,'' in which loan defaults by developers and builders exceeds 5.5 percent and house prices plunge 20 percent, is a ``remote'' possibility.

Ratings Downgrades

Five Spanish lenders may be at risk of ratings downgrades if the country's economy worsens more than expected, Moody's said in the report, without identifying the firms.

``We have no concern at all about the strength of the Spanish financial system,'' Deputy Finance Minister David Vegara said at a press conference today in response to the report.

Policymakers in Europe and the U.S. have criticized ratings firms for their response to the credit market slump earlier this year. European Central Bank President Jean-Claude Trichet and U.S. Senate Banking Committee Chairman Christopher Dodd have pointed to possible conflicts of interest between the firms and the banks that pay their fees. The Securities and Exchange Commission said in August it was examining the way the companies assign ratings.

`Talking in Abstracts'

``I'm not sure what it contributes talking in abstracts,'' Vegara said about today's Moody's report. ``Ratings agencies should take particular care with their communications after what happened in August.''

Moody's calculates the ability of Spanish banks to absorb an increase in loan defaults by estimating the potential losses that a lender can offset with its earnings, loss reserves and capital they hold in excess of that required by regulators.

The prices of existing houses and apartments in Madrid fell to 4,277 euros ($6,796) a square meter in the three months to the end of September, a 0.9 percent decline from the previous quarter, according to property Web site idealista.com. In Barcelona, the average asking price fell 0.5 percent to 4,802 euros, said the Web site.

To contact the reporter on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net

Last Updated: October 2, 2007 11:47 EDT