12 May 2012

Spain's banks told to increase bad loan provision

12:38 pm on 12 May 2012

The Spanish government has told the country's severely troubled banks to set aside an extra €30 billion to cover potential losses on loans in the property market and construction industry.

The banks will have to raise the money or borrow from the government at an annual interest rate of about 10%.

The government said it was determined to take the necessary measures to restore credibility and trust to the financial system.

It has already forced banks to make provisions of €54 billion euros to cover bad loans, the BBC reports.

If banks have to go to the government to borrow money, the loans will be structured so that they could ultimately be converted into partial state ownership.

The government is now appointing independent auditors to value the banks' property assets.

A housing boom and bust has left many small lenders holding mortgage debt that may not be repaid.

The banks will also be forced to put some of their mortgage books into separate companies.

The Madrid stock market fell more than 3% after the reforms were announced.

The European Commission has predicted that the euro zone as a whole will contract by 0.3%.

It expects a fragile recovery in 2013 but said Spain would remain in recession.