Spanish banks financed the building splurge. Now what?

Anyone who has spent time on the Spanish coast in recent years could see that the construction boom was out of control. In some areas there are building sites as far as the eye can see. You would have to be blind not to see it.

And anyone with the slightest knowledge of how an economy works could have told you that banks were financing that building splurge (with other people’s money, of course).

Now it looks like the day of reckoning is near. Morgan Stanley, an international investment bank, has just issued a report warning about the risks to the Spanish banking system following Spain’s property crash.

Most analysts agree that savings banks (cajas) look the weakest. This shouldn’t surprise anyone, as they are basically controlled by regional politicians through their placemen. What do local politicians and their cronies know or care about efficient allocation of capital? Not a lot. They have other concerns, like creating jobs (construction is labour intensive), funding pet projects, buying favours, that sort of thing. As a result, the exposure of cajas to Spanish real estate is astronomical, which is why the international ratings agency Moody’s has just downgraded its general rating and debt rating on 5 Spanish savings banks (Caixa Catalunya, la CAM, Bancaja, Caixa Tarragona y Caixa de Terrassa),

The other day CAM, a savings bank from the Valencian region with a big real estate exposure in Valencia and Murcia, did a type of IPO to tap the markets for money. It sold ‘participative shares’ that entitle holders to a dividend but no voting rights or say in the management of the company. So you get a dividend, if the management decide to pay one, but have no influence over how the company is run. Some say the bank is desperate for cash, and can’t get its hands on any via the international money markets, or from deposits, so came up with this ruse to tap small investors for their money. The shares sold at the bottom of the estimate, but the fact is that people bought them. The foolish things people do with their money.

Following the example of CAM, expect several other cajas to try selling ‘participative shares’. But they will have to be quick. They longer they leave it, the more obvious it will be that they have not lent sensibly in recent years. Then even gormless small investors won’t touch their ‘participative shares’. After all, who wants to participate in losses?



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