The ratio of bad loans as a proportion of total lending climbed to 7.42 percent, the highest level since 1994, from 7.16 percent in September and 5.68 percent a year earlier as the value of borrowings in default rose to 131.9 billion euros ($171.9 billion), the Bank of Spain in Madrid said in a statement today. Lending fell 2.5 percent from a year ago, following a record 2.6 percent drop in September, and deposits slid 2.2 percent to their lowest level since 2008.

Rising defaults and declining loans and deposits show how banks are suffering from the fallout of Spain's property slump and a wider European debt crisis that has shut them out of wholesale debt markets. Spain's Prime Minister-elect Mariano Rajoy, who is making an inaugural speech to parliament today, said that a "second wave" of restructuring of Spain's banks is inevitable, including more mergers.

"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," said Inigo Lecubarri, who helps manage about $300 million at Abaco Financials Fund in London. "A non- performing loans ratio of 7.4 percent is already very bad. Ten percent would be catastrophic and it's not impossible we could get there."DISCLAIMER:Text may be subject to copyright.This blog does not claim copyright to any such text. Copyright remains with the original copyright holder.