UPDATE 1-Spain's Solbes worried by rise in bad debt-report

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MADRID, Oct 5 (Reuters) - The rate at which bad debt ratios have risen in Spain is "worrying," Economy Minister Pedro Solbes said in an interview with newspaper El Mundo on Sunday.

"Non-performing loans ... have risen extremely fast and that is worrying. It's not the level of bad debt, but the rapid rise," Solbes told the paper.

Loan defaults for banks hit a 10-year high of 2.15 percent in July, up from 1.6 percent in June, Bank of Spain figures show.

Spain's central bank says the banking system is well provisioned and that the July rise in defaults was largely due to the failure of property group Martinsa Fadesa (MFAD.MC).

The decade-long property boom imploded this year after chronic overbuilding, forcing Spain's biggest property company Martinsa Fadesa to file for administration in July.

However, many economists said that as Spain's economic situation worsens, the banking system could start to face problems as unemployment rises and defaults increase.

Spanish banks have not invested in financial instruments that could have been infected by toxic debts from the U.S. subprime mortgages, Solbes said, but added that the system could still be affected the global turbulence.

"I don't see any Spanish institution in danger for the moment, but I can't say that we are shielded from everything and nothing will happen," he said.

Some banks and sectors are suffering from a lack of liquidity more than others, Solbes said.

Solbes also said he did not expect the Spanish economy to return to GDP growth of around 3 percent until 2011, and reiterated the government's forecast that the Spanish economy would begin to recover in the second half of 2009.

Most economists say they expect Spain's economy to enter recession in the second half of this year, a sharp slowdown from the GDP growth of 3.7 percent in 2007. (Reporting by Paul Day; Editing by Erica Billingham)