MADRID/SANTANDER (Reuters) - Spain's short-term debt costs rose on Tuesday and data showed higher bad loan rates in the banking sector, casting doubt on the government's assertion that the worst of the economic crisis had passed.
Lenders' non-performing loans rose for the second month running in April, to 10.9 percent of the credit they have granted, Bank of Spain data showed.
Last year, steep provisions against soured property deals forced Spain to bail out several banks with the help of international funds, a process that has sent private lending tumbling and delayed any recovery from a deep economic slump.
Spanish banks will likely have to cough up another 10 billion euros (8.57 billion pounds) in provisions against loan losses in the next two years to counter rising bad debts, Economy Minister Luis de Guindos acknowledged.
But echoing comments made on Monday by Finance Minister Cristobal Montoro, he also said recent data showed Spain's year-and-a-half long recession was almost over.
"In the second quarter there has been a tipping point which suggests the recession could be ending ... We saw the economy shrink by 0.5 percent in the first quarter, but this quarter it will be much closer to zero," de Guindos told a financial conference in the northern city of Santander.
Spain's economy has been in and out of recession since a massive property bubble burst in 2008 and is widely expected to continue to shrink into early next year.
De Guindos' comments suggest the government, which officially sees the economy contracting 1.3 percent this year, is beginning to ramp up expectations for an early recovery after previously saying a turnaround would not come until end-2013.
Analysts questioned that view.
"I think the government's forecasts are largely inconsistent with what leading indicators are telling us ... I'm really not clear yet what will drive the Spanish economy... forward," said economist at Citi Guillaume Menuet at Citi.
As the government trumpets recovery, markets are concerned that the U.S. Federal Reserve asset-buying programme could end soon.
That, along with European Central Bank backing for debt issued by the euro zone's struggling nations, has helped Spain raise cash at record-low rates.
At the Spanish treasury auction on Tuesday yields on 6- and 12-month T-bills rose for the first time in months, with borrowing costs on the shorter paper almost twice last month's rate.
Rising debt servicing costs would put Spain further behind the curve in meeting tough public deficit targets, raising the risk of another round of fiscal belt-tightening.
A similar vicious circle has seen record unemployment fuel rising defaults, with a drop in lending by troubled banks in turn leading more companies to go bust.
An overhaul of rules on loan refinancings, which will force lenders to recognise even more bad debts, could leave banks will a capital shortfall of 2 billion euros, de Guindos added, based on the extra 10 billion euros of provisions they will need.
The capital gap is far smaller than the 54 billion euros Spanish banks were estimated to need last year to prop up their balance sheets, after Spain was forced to ask for 41 billion euros in European aid to help the weakest lenders.
But while many banks may be able to bridge the latest capital shortfall without state aid, doing so could further squeeze lending as banks focus on storing up earnings.
Spanish bankers have urged politicians to kickstart more government programmes for companies unable to get credit, while Prime Minister Mariano Rajoy on Saturday reiterated calls for EU authorities to do the same, as he asked the ECB to create a cheap funding scheme for small businesses.
"We need to finish all reforms including the financial sector one, as we need to manage to get credit flowing in the economy again as the credit market is distorted," Angel Cano, Chief Executive of lender BBVA (BBVA.MC) said at a business conference in Madrid on Tuesday.
($1 = 0.7492 euros)
Additional reporting by Jesus Aguado, Editing by Fiona Ortiz, John Stonestreet