FRANKFURT (Reuters) - Banks across the euro zone sharply cut their stock of bad loans in the fourth quarter, with Italy and Ireland producing the biggest reductions, European Central Bank data showed on Tuesday.
The ECB has made tackling the region's pile of bad loans a top priority, releasing fresh guidelines last year and telling banks to come up with concrete action plans.
The banks, responding to the ECB push, reduced their so-called non-performing exposures to 931 billion euros by the end of last year from 972 billion three months earlier.
Italy alone accounted for half of that drop but, despite this steep fall, about one in every ten Italian loans was considered "bad" and the country accounted for more than a quarter of the euro zone's soured debts.
Across the euro zone, a pile of nearly 1 trillion euros ($1.09 trillion) of bad debt, a legacy of the euro zone's debt crisis, has weighed on lending, holding back growth and prolonging the bloc's economic malaise, a big worry for the ECB as its own economic stimulus has mostly run its course.
A big obstacle to cutting the bad debt backlog is that the private market for such loans is small and illiquid, resulting in excessively low prices. This discourages banks from offloading the loans at significant losses and leaving their balance sheet with a difficult-to-fill capital shortfall.
UniCredit has led the way in cutting bad debt, raising capital and setting aside 17.7 billion euros worth of loans for sale by the end of 2017.
But Monte dei Paschi di Siena, crumbling under a massive bad debt pile, has had little visible success so far, as its planned state rescue has dragged on longer than anticipated.
And data from the Bank of Italy shows that other Italian banks have also failed to make significant progress, leaving UniCredit as the biggest contributor to the reduction.
Irish banks reduced their non-performing loans to 33.5 billion euros from 38.5 billion but banks in Spain, which sit on the third biggest pile of bad loans after Italy and France, made virtually no progress, the ECB data showed.
Anticipating some losses, banks have set aside reserves equal to 44.6 percent of all their bad debt, a slight increase in the 'coverage ratio' from three months earlier.($1 = 0.9192 euros)
Reporting by Balazs Koranyi. Editing by Jane Merriman