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EU praises Spain's banks but wary over debt risk

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EU praises Spain's banks but wary over debt risk
Spanish banks are regaining access to funding markets and their deposits have been rising, the European Commission and the European Central Bank have said.Photo: Daniel Roland/AFP
09:25 CEST+02:00
EU officials hailed the strengthening of Spain's banking sector on Monday after it was thrown a €41.3 billion ($56 billion) lifeline last year but warned that a drop in lending and high debt levels pose a risk to the nation's banks.

Spanish banks are regaining access to funding markets and their deposits have been rising, the European Commission and the European Central Bank said in its latest report on Spain's programme of financial reforms.

But it warned that while there were signs that Spain's economic downturn was "bottoming out", the weak economy continued to weigh on the banking sector.

"Lending to the economy is still contracting substantially, in particular against the backdrop of weak demand for new lending and persisting EU banking markets' fragmentation," the report said.

"While there are early signs of a general economic stabilization, both the private and public sector need to reduce their debt stocks going forward, and the adjustment in the real estate market is still ongoing. Both elements still impinge on the profitability prospects of banks," it added.

The report forms part of the surveillance by the European Commission, the European Central Bank and the Washington-based International Monetary Fund to check Spain's compliance with conditions imposed in July 2012 in return for its banking rescue loan.

The three institutions, dubbed "the troika", concluded their fourth review of the reform programme on Friday.

Spanish banks have become swamped in bad loans since a property bubble imploded in 2008 plunging the country into a double-dip recession and throwing million of people out of work.

The proportion of loans held by Spanish banks that are at risk of not being repaid climbed to a record high of 11.97 percent of all credit in July, up from 11.63 percent the previous month, the central bank said in a report earlier this month.

The government predicts the Spanish economy, the eurozone's fourth-largest, will return to growth of between 0.1 and 0.2 percent in the current quarter.

It forecasts economic growth will reach 0.7 percent in 2014 after shrinking by 1.3 percent this year.

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