Loan-default ratio hits highest level since 1994

Non-performing loans in the Spanish banking system hit new record levels in absolute terms in October, while the ratio of these to total lending reached levels last seen about 17 years ago as the economic recovery started grinding to a halt.

According to figures released Monday by the Bank of Spain, the amounts of loans that have not been serviced for over three months rose by 3.828 billion euros to 131.908 billion as of the end of October, while the non-performing loan ratio climbed from 7.16 percent in September to 7.42 percent, the highest level since November 1994. Total outstanding loans dropped by 10.192 billion euros to 1.77 trillion.

The Spanish economy stagnated in the third quarter of this year and is expected to post negative growth in the last three months of the year.

"What we have been saying for a while, and I think the banks themselves have been in denial on this, is that the asset quality decline has not bottomed out yet because unemployment is still going up," Bloomberg quoted Iñigo Lecubarri of Abaco Financials Fund in London as saying.

Prime Minister-elect Mariano Rajoy told Congress on Monday he plans to clean up the banking sector, which has 176 billion euros in problematic assets as a result of its exposure to the ailing real estate sector. This would take place through restructuring involving another round of mergers.