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ECB Lending to Spain Rises to Record 49 Billion Euros

The European Central Bank lent a record 49.4 billion euros ($73.6 billion) to Spain's banks as a worsening housing slump spurs the fastest pace of borrowing among the 15 nations sharing the euro.

ECB lending to Spain rose from 47.1 billion euros in June and 18 billion euros a year ago, according to data compiled by the Bank of Spain.

Spain's banks are struggling to attract investors as a decade-long property boom ends and mortgage delinquencies soar to the highest in at least six years. Investors demand higher rewards to buy bonds backed by Spanish mortgages than any other home loans in Europe at 2.5 percentage points more than interbank rates for AAA notes, according to UniCredit SpA data.

``The Spanish banking demand for greater funds reflects a sharp deterioration in local conditions,'' said Meyrick Chapman, fixed-income strategist at UBS AG in London.

The ECB provided 458.1 billion euros overall for banks in July, compared with 460.6 billion euros a month earlier and 437.7 billion euros in June 2007.

``Funding remains a major problem for the European banking system as a whole,'' Chapman said.

Spain's share of ECB borrowing has increased to 10.8 percent from 4 percent a year ago, according to Bank of Spain data. That is the fastest increase in Europe, overtaking Italy, Ireland and the Netherlands, according to data from countries' central banks.

Loan Defaults Double

Banks with operations in the countries sharing the euro can raise funding from the ECB by pledging certain types of collateral including asset-backed securities. Bonds backed by mortgages and other assets accounted for 18 percent of the ECB's loan collateral at the end of 2007, up from 4 percent in 2004, Fitch Ratings data show.

The ECB lends to banks mostly through the main refinancing operations maturing in one week. Longer-term auctions provide financing to banks during three- and six-month periods.

Spanish lenders increased their use of three-and six-month ECB loans to 33.72 billion euros as of July, from 2.5 billion euros a year earlier, according to the country's central bank.

Spanish loan defaults more than doubled in May to 27.8 billion euros or 1.5 percent, from 12.1 billion euros or 0.77 percent a year earlier, according to the Bank of Spain, as the housing slump that began with subprime mortgages in the U.S. crossed the Atlantic.

Mortgage arrears in Spain are the highest in six years, at 3.61 percent of mortgages included in securities rated by Standard & Poor's, up from 2.96 percent at the end of last year.

To contact the reporters on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net;

http://www.bloomberg.com/apps/news?pid=20601009&sid=ah5AAyYGKiMI&refer=bond