Banks now required to separate property assets from their balance sheets and set aside $39bn to cover losses.

The government in Spain has announced a new set of financial reforms, particularly aimed at cleaning up the country’s banking system, which is saddled with bad loans.

It approved measures forcing banks to set aside a new 30bn euro ($39bn) financial cushion on top of 54bn euros ordered in February as insurance against bad loans on property.

The new rules also require banks to separate property assets from their balance sheets.

The government of Mariano Rajoy took the sweeping action just two days after it effectively took over the fourth-biggest bank, Bankia, to salvage its balance sheet, bulging with losses.

The government also ordered an independent audit on loans and property assets across the entire banking sector, as the European Union had asked.

Luis de Guindos, Spain’s economy minister, said: “The government wants complete transparency, clarity is crucial to end any doubt about Spain’s solvency.”

Banks have until the end of the year to move their property holdings into asset-management firms for a fire-sale, Guindos said.

Deficit-cutting targets

Spain separately annnounced that it stood by its ambitious deficit-cutting targets for 2012 and 2013 despite European forecasts that it would fail to achieve them.

Guindos said the European Commission report failed to take account of all austerity measures.

Al Jazeera’s Sonia Gallego, reporting from Madrid, said “with the gravity of the economic situation [in Spain], it is getting increasingly difficult” for the government to refinance as much of the debt as it can.

Spain’s banks were hit by billions of euros of losses after a decade-long property bubble burst in 2008 and concerns about them, and the country’s overspending regional governments have fanned fears of a new eurozone debt crisis.

Toxic assets now total 184bn euros, but many fear the hole is even bigger. Successive waves of bank sector clean-ups have failed to convince investors.

Our correspondent said that the toxic assets were a result of the property bubble.

“As a result, with the recession, so many people were left unable to pay for their mortgages, and the banks are left to deal with the after-effects,” she said.

A resident of Madrid told Al Jazeera: “It’s not the fault of the people who bought their homes with mortgages that they might not have been able to afford.

“It’s the fault of the politicians and those making bad lending decisions with our economy,”

Shrinking eurozone

The developments come amid the release by the EU of new figures confirming that the eurozone will shrink 0.3 per cent in 2012.

In Spain, one in four of its workforce is without a job, and the latest prediction from the EU says Spain is going to stay in recession for some time to come.

Thus far, however, the government action to clean up its banks seems to have failed to boost the sector’s stocks.

Madrid’s IBEX-35 index of leading shares closed down 0.71 per cent, but at one point was off more than 3.0 per cent as even the healthiest banks suffered.

Santander, the eurozone’s biggest bank by assets, fell 1.0 per cent to 4.871 euros, Spanish number-two BBVA dropped 1.26 per cent to 5.243 euros and Bankia skidded 3.37 per cent to 2.034 euros.

Bankia, in which the state is taking a 45-per cent stake as a crisis measure to save it from crippling bad loans, had 37.5bn euros in exposure to the property sector at the end of 2011.