Spanish banks’ non-performing loans ratio, a key indicator of their financial health, jumped to 6.06 per cent in January, the highest level since 1995, the Bank of Spain said yesterday.

It said total bad debt held by the banks soared to €110.69 billion, a ratio to total outstanding loans of 6.06 per cent, up from 5.81 per cent in December and 5.69 per cent in November.

The bad loan rate, which was 4.98 per cent in October 2009, was the highest since November 1995.

Spain’s lenders, especially its regional savings banks that account for about half of all lending in the country, have been heavily exposed to bad debt since the collapse of the property sector at the end of 2008.

Moody’s last week downgraded Spain’s credit rating by one notch to “Aa2” and warned it may do so again on fears the government will be unable to meet its targets of slashing the public deficit and on concerns over the cost of restructuring the banking sector.

Spain’s finances and economy, with a jobless rate of just over 20 per cent the highest in the industrialised world, have prompted fears it may need a costly EU bailout like Greece and Ireland.

However, markets have shown renewed confidence in the Spanish economy recently, as evidenced by the lower yields on government bond sales. The government has strengthened bank balance sheets, cut spending and pursued economic reforms to allay market jitters over the outlook for Spain’s finances.

Under government regulations announced last month, the banks must raise the proportion of core capital they hold to eight per cent of total assets from the current six per cent, or 10 per cent if they are not listed on the stock exchange.