The ratio of bad loans at Spanish banks rose in August to 13.25 percent, the Bank of Spain said Friday, a worrying sign as the ECB put the final touches on its bank assets review, or stress tests.
The volume of bad loans, primarily a legacy of the country's real estate boom that went bust, actually dipped slightly to 184.3 billion euros ($236.2 billion), but the ratio rose as Spanish lenders cut back on lending.
The ratio is still below the record 13.6 percent it set last December.
Markets have taken fright this week at the potentially disastrous combination of recession and deflation taking root in the eurozone, sending the yield on bonds of periphery countries including Spain sharply higher.
However the markets are also on edge over the ECB's Asset Quality Review that comes out on October 26, which some worry could show that lenders have been hiding bad debts and thus need more capital than previously expected.
One factor upsetting eurozone markets on Thursday was a sudden assurance that the European Central Bank was ready to shore up Greek banks, and another assurance from the European Commission that it too stood ready to help Greece if it ran into trouble as it heads to emerge from its debt-rescue programme