SPANISH BANKS’ bad loans rose in March to their highest in 18 years, underscoring the problems facing the government as it drafts in independent auditors in an attempt to reassure investors it can clean up the sector.

The Bank of Spain said bad loans rose to 8.37 per cent of banks’ outstanding loans, the highest since August 1994 and up from 8.3 per cent in February, which was also revised higher.

The data was released before Spain names auditors on Monday to assess how bad the losses are likely to get, and how much cash banks will need to rebuild their balance sheets.

The audit will start with a one-month stress test followed by a deeper analysis of assets in the financial sector, deputy prime minister Soraya Saenz de Santamaria said.

Financial sources have said fund manager BlackRock and management consultancy Oliver Wyman would probably be named to conduct the deep audit. But a government source said six funds and management consultancies have placed bids for the work, while a different government source said BlackRock may have a conflict of interest.

The Bank of Spain figures, released hours after a mass bank downgrade by credit ratings agency Moody’s, showed losses from loans made in Spain’s housing bubble are still rising. The Moody’s move had been expected, however, and Spanish bank shares rebounded on Friday after a grim week. Shares in part-nationalised Bankia leapt by a quarter to cut recent losses.

Troubled banks, along with overspending in indebted regions, are the two biggest risks for Spains public finances. Investors believe Spain needs to address these two issues aggressively to avoid an Irish-style bailout. Banks expect bad loans to continue to rise this year as the economy contracts and the jobless rate remains painfully high at almost one in four of the workforce, the highest in the EU.

Against that backdrop, analysts estimate bad loans could rise to nearer 15 per cent of loans. – (Reuters)