By Julien Toyer and Jesús Aguado
MADRID (Reuters) - Spain on Friday ordered its banks to significantly increase funds set aside against mounting losses from toxic real estate lending and pledged limited government aid for weaker lenders in the form of high-interest loans.
Spain's country risk, as measured by the spread between Spanish and German benchmark government bonds, jumped during the announcement of the new measures to 456 basis points and stocks fell, indicating markets were not convinced with the latest attempt to resolve a four-year banking crisis.
The centre-right government also ordered an independent audit on loans and property assets across the entire banking sector, as the European Union had asked.
Banks have until the end of the year to move their property holdings into asset management firms for a fire sale, Economy Minister Luis de Guindos said at a news conference to announce the new measures.
The lenders must provision 30 billion euros ($39 billion) on top of 54 billion euros ordered in February, to cushion performing loans as well as bad ones.
For banks unable to raise the necessary funds, the government will provide five-year loans convertible into shares with a yield double that of interest paid on the equivalent government bond.
Spain's troubled banks, with more than 184 billion euros in problem loans and assets, are at the heart of the euro zone debt crisis due to fears that a massive rescue could push Spanish public finances to breaking point.
De Guindos estimated the state would put less than 15 billion euros into the latest of four separate bank rescues that Spain has enacted over the past three years.
He said the government was not injecting cash into the banks, only loans, though the convertible bonds imply that the government could eventually end up with equity stakes.
Rescue money for banks, crippled after a 10-year building bubble burst in 2007-2008, is a touchy subject in Spain, where public spending cuts have eaten into education and health services.
"This reform will grant credibility and build confidence in the financial sector, increase credit flow in our country and lead to home sales at reasonable prices," Deputy Prime Minister Soraya Saenz de Santamaria said at the news conference.
A definitive clean-up of troubled banks, as well as an accelerated 2014 budget, are among reforms that could win centre-right Prime Minister Mariano Rajoy more time from the European Union to hit tough deficit targets, EU sources told Reuters, although Spain says it is not asking for leniency.
The European Commission published new forecasts on Friday showing Madrid will have to make big additional savings this year and next to meet its promise to cut the public deficit to 3 percent of national output in 2013.
The EU executive said Spain would have a deficit of 6.4 percent in 2012 and 6.3 percent next year unless policies change. The government reiterated on Friday its vow to bring the shortfall down to 5.3 percent this year from 8.5 percent in 2011.
Spain effectively took over Bankia SA, one of the country's biggest banks, this week after days of market anxiety over the lender's viability.
De Guindos said the government would announce full plans for Bankia in a few weeks. ($1 = 0.7716 euros)
(Additional reporting by Manuel Ruiz; Editing by Fiona Ortiz and David Holmes)