Level of Spanish banks' exposure to bad property debts revealed

The latest Financial Stability Report from the Banco de Espana has revealed the extent to which banks in Spain are tied to "troubled" assets in the real estate sector.

According to the central bank, financial institutions have been linked to €176 billion (£151.5 billion) worth of exposure to the Spanish property market, constituting 52 per cent of total loans received by the country's developers.

The report cautioned that the continuing economic instability in the eurozone region, coupled with a weak economic performance in Spain itself, "might result in increases in bad debts on top of those already seen".

Earlier this year, the Spanish government announced a 50 per cent reduction in the value-added tax charged on the purchase of new-build homes, cutting it to four per cent of the dwelling's worth.

The lower rate is due to expire on December 31st 2011, with officials hoping that the change will help Spain's developers shift some of the 700,000 empty holiday homes that were constructed before the market crashed.