Concern grew for the stability of Spain's place in the fragile eurozone economy after reports of a rise in the level of bad loans on the books of its banks and word from the government Friday that it may have to revise its 2011 budget deficit upwards for a second time.
The Bank of Spain reported that lenders' and savings banks' bad loan ratio had risen in March to an 18-year high of 8.36 percent from 8.15 percent the previous month.
The Finance Ministry then said in a statement late Friday the deficit could reach 8.9 percent of GDP after four of its 17 regions overshot their expected budgets. The regions mentioned were Madrid, Valencia, Andalusia and Castilla-Leon.
News of the increase in bad loans followed a downgrading by credit ratings agency Moody's late Thursday of the country's banking industry.
Spain's budget deficit is higher than the 3 percent threshold that was supposedly part of the euro's economic framework. The incoming government of Prime Minister Mariano Rajoy earlier had to revise the figure upwards to 8.5 percent of GDP from the 6 percent forecast by the previous, Socialist government.
The ministry said it still expected to hit its target of 5.3 percent for this year's budget deficit.
Moody's acted late Thursday, citing Spanish banks' heavy load of non-performing loans amid a recession-plagued economy, their trouble raising financing on capital markets and the government's sovereign debt problems, which might make it hard for the government to come to the aid of banks.
Spain is in the eye of the storm of the eurozone debt crisis amid worries that its banks are overexposed to an imploded real estate bubble and the government, fighting recession and a nearly 25 percent jobless rate, could not afford to bail them out if it needed to.
Nuria Alvarez, a banking analyst with Madrid brokerage Renta4, warned that the rise in the bad loan ratio could mean that Spain's banks will get hit harder as the country's recession bites deep and unemployment worsens.
Shares in Bankia , SA, a recently nationalized bank that is heavily laden with toxic assets, shot back up 24 percent after losing 14 percent Thursday in a session in which they had plummeted as much as 27 percent on a media report that depositors had withdrawn (EURO)1 billion ($1.27 billion) in the week since the state took over.
Alvarez added that investors had factored in the downgrade in Spain because Moody's warned a few months ago that many European banks were up for review and could take a ratings downgrade.
Bankia customer Francisco Hidalgo, a 53-year-old tailor, said he had no plans to pull out his money, saying it would make no sense.
He spoke at a branch with just a few people doing transactions and no atmosphere of panic or jitters. Hidalgo said he wondered whether the government thought that replacing Rodrigo Rato, a former IMF managing director, with prominent career banker Jose Ignacio Goirigolzarri to run Bankia as part of the nationalization would calm things down.
"But now we see things have remained the same," Hidalgo said.
Alvaro Gonzalez, a retired business teacher, said Bankia must be really bad off.
"All I know is they must be up to here" _ he put his hand above his head _ "in loans for property that is not worth what they thought," Gonzalez said.
The nervousness about Spain's banks comes as the eurozone financial crisis intensifies. Political turmoil in Greece has increased the likelihood that it could leave the 17-country monetary union, a move that could have ripple effects throughout Europe and the world's financial markets.
Depositors have been pulling their funds out of Greek banks. People fear the country's financial sector might collapse if Greece left the eurozone and that their savings would become worthless if the country started using a substantially devalued new currency, such as the drachma.
Earlier this week, Moody's also downgraded the debt ratings of 26 Italian lenders as they struggled with the effect of the country's weak economy and government austerity measures.
At the close of trading Friday, Spain's IBEX35 stock index closed up 0.4 percent after having dipped by more than 2 percent shortly after trading began.