Bad loans held by Spanish banks have hit a 17-year high according to fresh data that triggered the stockmarket in Madrid to plunge almost 4% yesterday (Wednesday).
The Bank of Spain said that failures by companies and households to repay their loans topped 8.16% in February - the highest level since 1994.
The figure showed that euros 143.82bn (pounds 117.7bn) of loans were more than three months past their repayment deadlines. A month earlier, the bad loan rate was 7.91%.
Traders fled Spanish stocks amid fears that the nation's indebted banks would buckle under the weight of the debts.
Economists have repeatedly warned that Spain's banks are woefully undercapitalised and, with billions of euros of debts, have the potential to torpedo prime minister Mariano Rajoy's austerity efforts.
The data compounded investor jitters that were already rising ahead of Spain's auction of 10-year debt on April 19. Italy's MIB was worst affected, falling 2.42%. The Eurostoxx 50 slid 1.66%; France's CAC fell 1.59%; Germany's DAX dropped 1%. In London, the FTSE?100 held firm, dropping just 0.38%.
Spain's borrowing costs jumped back up to 5.8%; Italy's rose to 5.5%.
Jens Weidmann, ECB policymaker and head of the Bundesbank, appealed for calm and insisted that Spain would not need a bail-out. "We shouldn't always proclaim the end of the world if a country's long-term interest rates temporarily go above 6%," he said. Instead he argued that the bond market's alarm should be "a spur for policymakers in the countries concerned to do their homework and to win back confidence through the pursuit of the reform path".
Germany benefited from selling short-term debt at record lows. Berlin shifted euros 4.21bn of two-year debt at average yields of 0.14%, compared with 0.31% at the last auction in March.
Even so, economic data showed that even Germany's powerhouse economy is not immune from the crisis.
Construction output in the country dived 17.1% in February, according to EU statistics office Eurostat. Italian construction output fell by 10%, while output in the UK increased by 5.7%.
