The level of bad loans on the books of Spain's banks has risen to an 18-year high, the country's central banker reported Friday, increasing concern for the stability of Spain's financial sector and the country's place in the fragile eurozone economy.
The Bank of Spain reported Friday that lenders' and savings banks' bad loan ratio had risen in March to 8.36 percent from 8.15 percent the previous month.
News of the increase followed a downgrading by credit ratings agency Moody's late Thursday of the country's banking industry.
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
The country's Ibex 35 stock index was off more than 2 percent shortly after trading began Friday with banks initially among the biggest losers. But both the index and bank stocks recovered later. Banco Santander, SA and Banco Bilbao Vizcaya Argentaria, SA were up more than 3 points in mid-morning trading. Both were mentioned in the downgrade.
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percent Thursday in a session in which they had plummeted as much as 27 percent on a media report that depositors had withdrawn (EURO)1 billion in the week since the state took over.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. The rise in the big banks is no big deal, she said. "In a volatile market like this, a rise or fall of two points in one day is nothing," she said.
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 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.
On bond market the interest rate on Spain's 10-year bonds was down 9 basis points at 6.20.
Harold Heckle in Madrid in contributed to this article