Spanish banks' bad loans rose to their highest level since1994 in February, to 8.2 per cent of their credit portfolios, Bank of Spain data showed today, as the sector continues to battle sliding house prices and a looming recession.

Banks are facing a new wave of loan defaults as an economic crisis deepens and analysts say some may not survive as the government implements sweeping budget cuts that will only add to Spanish households' problems with repaying debt.

Non-performing loans increased by €3.8 billion to €143.8 billion in February from the previous month. They totalled 7.9 per cent of total debt portfolios in January.

That picture - driven by the collapse of a housing boom in the global financial turmoil of 2008 - is at the heart of problems for Spanish banks that have seen other institutions refuse to lend to them and forced some to rely on the European Central Bank for funding.

Spain's unemployment rate is already the highest in the European Union and is expected to rise further - putting more pressure on consumers and households.House prices also fell another 7.2 per cent in the first quarter from a year earlier, according to the Spanish public works ministry.

The Bank of Spain yesterday approved all 135 Spanish banks' plans to boost capital but said some may face difficulties meeting tough requirements set by the government.

The government set strict recapitalisation requirements in February to clean up the sector in an effort to reassure investors its ailing lenders won't need international help.

Reuters