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Spanish Banks’ Bad Loans Worsen as Recession Bites: Economy

More Spanish loans soured in March, fueling concern that the government’s focus on making banks clean up real estate was too narrow as the country’s economy entered a recession.

Bad loans as a proportion of total lending jumped to 8.37 percent in March, the highest since August 1994, from a restated 8.30 percent in February, according to data published today by the Bank of Spain. As much as 8.21 billion euros of loans soured in the first quarter, 90 percent more than in the same period of last year. The regulator said a further 4.15 billion euros ($5.3 billion) of loans went bad, in addition to its original 143.82 billion-euro total for February before the number was restated.

Spain’s government said on May 11 it would make banks take charges of about 30 billion euros to cover potential losses on real-estate loans that are still performing, adding to about 54 billion euros of provisions and capital ordered in February. With unemployment topping 24 percent and the economy set to shrink 1.8 percent this year, according to International Monetary Fund estimates, analysts say the state will need to impose more charges on banks as the slump damages assets beyond real estate.

“As the economy keeps getting worse, the banks will keep on having to make provisions to account for the negative impact of the lower activity and the higher unemployment,” Steen Jakobsen, chief economist at Saxo Bank A/S, said by telephone. “The first step in reaching a solution is recognizing the scale of the problem, and we’re not there yet.”

Sales of Protection

U.S. banks increased sales of protection against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the last quarter of 2011 as the European debt crisis escalated.

Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose 10 percent from the previous quarter to $567 billion, according to the most recent data from the Bank for International Settlements. Those guarantees refer to credit-default swaps written on bonds.

In Asia, surging food costs offer the most visible sign of India’s inability to contain price pressures, threatening spending in the world’s second-most populous nation. Even as the nation’s benchmark wholesale-price inflation has eased to below 9 percent after breaching that level most of last year, a recently introduced consumer-price gauge shows how little room the central bank has cut to cut interest rates and spur growth.

Bad Loans

India’s consumer-price index climbed 10.36 percent from a year earlier in April as prices of cereal, pulses, milk and meat products rose, compared with a revised 9.38 percent advance in March, a report showed today.

Concern more bad loans will come to light at Spanish banks has driven up the country’s borrowing costs on speculation the final bill may hurt government finances. Spanish 10-year bond yields surged to 6.46 percent this week, the highest since November. The yield slipped to 6.26 percent today, reducing the spread over German bunds of similar maturity to 4.84 percentage points.

Moody’s Investors Service downgraded 16 Spanish banks last night, citing the nation’s recession, reduced funding access for lenders and deterioration in loan quality that will spread beyond real estate to household and company loans.

“Mortgages to individuals have been quite resilient,” Maria Cabanyes, a Moody’s analyst in Madrid, said by phone today. “We don’t think this is sustainable given the government’s austerity program and high unemployment.”

Spain will announce on May 21 its choice of two companies to audit the banks’ loan books, Deputy Prime Minister Soraya Saenz de Santamaria said today. BlackRock Inc. and Oliver Wyman are among contenders for the work, according to a government official who asked not to be identified and briefed reporters in Madrid last night. The government will make the findings of the two-stage audits public and expects that the more than 600 billion euros of Spanish mortgage loans are generally properly valued and provisioned for, he said.

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