MADRID - SPAIN will increase its bank deposit guarantees fivefold to 100,000 euros (S$199,580) and set up a 30-billion-euro fund to buy bank assets to spur lending, Prime Minister Jose Luis Rodriguez Zapatero said on Tuesday.

The temporary fund, which will be managed by the Spanish treasury and used to buy 'quality assets' from financial institutions, could be extended to 50 billion euros if necessary, he told a news conference.

'We are going to provide an injection to finance the needs of companies and citizens until the markets once again start working normally,' he said as he outlined measures by his socialist government to face the global credit crisis.

'Credit makes the economy work. Without credit, there is no investment. And without investment there is no economic activity today, nor growth and job creation tomorrow,' he added.

Economic activity around the world is slowing because banks have become increasingly reluctant to lend money in the wake of the US subprime mortgage crisis, which erupted last year, saddling many institutions with toxic assets.

Spain is facing its first recession in over a decade in large part because its key property sector has been hammered by the impact of rising interest rates, oversupply and the international credit crunch.

Bank of Spain Governor Miguel Angel Fernandez Ordonez predicted on Tuesday that the Spanish economy, the fifth largest in the European Union, would decline or post a growth rate of nearly zero per cent during the second half of the year.

But he also voiced confidence in the country's banks, saying the were facing up to the global financial crisis better than lenders in other countries because they had a stronger provisioning system and were not as exposed to toxic assets.

'I want, as the governor of the Bank of Spain, to appeal for calm and reiterate my confidence in the Spanish financial system, which is well managed, well regulated and well supervised,' he told a parliamentary commission.

Economy Minister Pedro Solbes however called the rate at which bad debt has risen in Spain 'worrying' in an interview published on Sunday in daily newspaper El Mundo.

Loan defaults for banks hit a 10-year high of 2.15 per cent in July, up from 1.6 per cent in June, according to Bank of Spain figures.

Spain's new deposit guarantee is double the minimum base of 50,000 euros agreed earlier on Tuesday by EU finance ministers at their monthly meeting and five times the amount of the previous minimum in the 27-nation bloc.

The agreement fell short of the 100,000 euros that had been mooted prior to the meeting, reflecting concerns in poorer Eastern European countries that would have struggled to meet the higher obligation.

The Netherlands, Greece and Austria also announced on Tuesday that they were also raising their deposit protection to 100,000 euros.

After Germany offered a blanket guarantee on bank deposits on Sunday, Britain, Denmark, France, Portugal and Sweden indicated they had similar plans in the works.

Ireland triggered the rush last week with it offered an unlimited guarantee on all deposits at its biggest banks.

Analysts have expressed concern that if European nations set up varying bank deposit guarantees, people may chose to move their savings to those countries with the greatest protection, possibly sparking a flight of funds to them and thereby causing problems for the banks losing deposits.

Mr Zapatero announced the measures one day after he met with top executives from Spain's six largest banks - Santander, BBVA, Banco Popular and unlisted savings banks La Caixa, Unicaja and Caja Madrid - to discuss the global financial crisis.

Spain has until recently had one of the developed world's fastest growing economies, its gross domestic product having expanded by 3.7 per cent last year.

Its second-quarter output slowed to an annual rate of 1.8 per cent, the lowest rate in 13 years, from a revised 2.6 per cent in the first quarter. -- AFP