Spain has long had a reputation for big lottery prizes like ‘El Gordo’ (the fat one), but these days international investors are just as likely to associate it with big property market problems, problems big enough to bring local banks to their knees.

Now the guessing game as to which Spanish financial institution would buckle first has finished. Over the weekend the Bank of Spain stepped in to bailout Caja Castilla La Mancha (CCM), one of Spain’s regional savings banks, replacing the top management and providing the bank with 9 billion Euros of government-backed guarantees.

Justifying the action, Pedro Solbes, Spain’s Finance Minister, said that CCM is only suffering temporary liquidity problems, and there is no “black hole” in its balance sheet.

CCM, a savings bank from the Castilla La Mancha region, and one of Spain’s smaller financial institutions, and has been brought down by a heavy exposure to Spain’s real estate sector. Its bad debt ratio reached 5% as loans to developers and home buyers turned sour.

More to come?

Thanks to a vicious cross fire from the Spanish property market crash and the credit crunch, CCM may not be the last financial institution in need of a bailout. Bad loans and mortgage delinquencies will create a “big hole” worth as much as 10% of Spanish GDP that Spanish banks will have to deal with, according to Xavier Sala i Martín, a professor of economics at Columbia University.

Speaking at a recent conference Sala i Martín warned that the Spanish economy is too dependent upon the real estate sector, arguing that “some builders and developers have to fail,” to help rebalance the economy.

Construction and property sector debts add up to 300 billion Euros, or 27% of Spanish GDP, which Sala i Martín describes as a “catastrophe”. “And these figures don’t take into account what is coming next,” said Sala i Martín, quoted in the Spanish daily El Pais.

Sala i Martín also pointed out that paying the mortgage will soon be more difficult for many Spaniards as 1 million people lose their unemployment benefits, which only last a year.