Spanish banks' bad loans highest since August 1994

MADRID (Reuters) - Spanish banks’ loans in arrears rose to 7.9 percent of their outstanding portfolios in January, their highest level since August 1994, Bank of Spain data showed on Tuesday.

This was up from 7.6 percent in December. Bad loans increased by 4.2 billion euros to 140 billion euros ($185 billion) in January from the previous month.

More Spaniards are defaulting on loans as the country slides back into recession and the unemployment rate, already the highest in the European Union, creeps upward.

Bad loans will continue to rise in 2012 in line with deteriorating economic conditions and a deepening housing market slump, said Raj Badiani of IHS Global Insight.

“This will place additional pressure on existing bank loans to the construction sector and property services,” he said.

These loans stood at 396.8 billion euros, or 37 percent of nominal gross domestic product, at end-2011.

Mortgage loans stood at 612.8 billion euros or 57 percent of GDP in the fourth quarter of 2011, with only 16.8 billion euros defined as doubtful.

Labour reform making it easier to fire employees with long-term contracts coupled with a deep and painful recession could lead to more permanent workers losing their jobs and more mortgage debt falling into arrears, said Badiani.

Reporting by Nigel Davies and Sonya Dowsett; Editing by Hans-Juergen Peters