(MADRID) - Spain's socialist government on Friday approved the creation of a 30-billion-euro emergency fund to buy mortgage debt from banks in a bid to stabilize the lending industry and unfreeze credit.

The green light for the establishment of the fund, which could be extended to 50 billion euros (68 billion dollars) if necessary, was given at a regular weekly cabinet meeting, Deputy Prime Minister Maria Teresa de la Vega said.

"This is a way to re-establish the normal functioning of our financial system, a decisive way to reactivate the economy and encourage the creation of jobs," she told a news conference.

Prime Minister Jose Luis Rodriguez Zapatero had announced the creation of the fund on Tuesday. It will be managed by the Treasury and is expected to start operating in November.

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.

The government hopes the fund will ease pressure on Spanish lending institutions and make banks more willing to make loans to households and firms.

The government will "shortly" unblock a first tranche of 10 billion euros into the fund, which will be dismantled once global financial markets begin working normally again, Economy Minister Pedro Solbes said.

"We are covering a failure of the market," he said.

The government expects the fund will push up its ratio of public debt to gross domestic product by almost three percentage points to 41.5 percent.

It will only be used to buy assets with the top "AAA" ratings unlike the bailout in the US where the government is buying bad mortgages or in Britain where the state is taking a stake in troubled lending institutions.

The government will be able to resell the assets once the global financial crisis eases and recover its money, De la Vega said.

"The government is not making a loan, nor giving anything away," she said.

Spain's banks have benefited from less exposure to toxic debts from US subprime mortgages, larger loan loss provisions and stricter lending rules.

But they are feeling the effects of an abrupt economic slowdown due to the the end of a decade-long property boom.

Solbes called the rate at which bad debt has risen in Spain "worrying" in an interview published Sunday in daily newspaper El Mundo.

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

Spain, which has until recently had one of the developed world's fastest growing economies, is facing the risk of its first recession in over a decade.

The International Monetary Fund on Wednesday predicted the Spanish economy, the fifth largest in the European Union, will shrink by 0.2 percent next year after posting growth of 1.4 percent in 2008.

It said Spain would be harder hit by the global financial crisis than other European countries because the effects of the property boom had come to an end.

Spain's socialist government predicts the economy will expand by 1.6 percent this year and 1.0 percent next year.

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