Spain’s financial system avoided the US subprime mortgage party, which helps to explain why Spanish banks have coped with the financial crisis better than many of their peers in the US and Europe, at least until now.
But though Spain’s banks never consumed or sold US toxic assets, that doesn’t mean they weren’t getting high on some fairly toxic financial products 100% ‘made in Spain’.
According to a recent article in the Spanish daily ‘La Vanguardia’, loans to developers are the closest thing Spain has to “toxic assets”, and with 318 billion Euros in loans outstanding, whilst default rates are surging, this is a looming issue for Spain’s banks.
Figures from the Bank of Spain show that the value of outstanding loans to Spanish developers has gone from just 33.5 billion Euros in 2000 to 318 billion in 2008, a rise of 850% in 8 years.
One expert mentioned in the La Vanguardia article claims that loans to Spanish developers are 6 times greater than in Germany and France.
If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to 470 billion Euros. That’s almost 50% of Spanish GDP.
But the really mad thing is that loans to developers almost doubled between 2005 and 2007, from 162 billion to 303.5 billion Euros, at a time when there was no shortage of signs that Spain was suffering from a property bubble.
The madmen lending vast amounts of money to developers at the blow off stage of the property boom were mainly regional savings banks, known as cajas, who wrote 54% of new loans to developers in 2008, compared to 41% for the commercial banks.
“The cajas have tried to grab market share with aggressive strategies,” explains Eduardo Martínez Abascal, a finance professor at IESE Business School in Barcelona, quoted in the article. “In the past they used to grant 100 mortgages to 100 home buyers, but recently they have preferred to lend 100 million to a developer. They didn’t realise that the risks were different, that ordinary borrowers will pay the mortgage above all else because otherwise the bank repossesses their homes.”
Now the boom has turned to bust, sales have collapsed, and numerous developers have gone bust. All of a sudden those 318 billion Euros in loans to developers don’t look like such a good idea. Default rates have surged from below 1% in the boom to 3.8% in January, and many expect the rate to go to 6% this year, as banks write off bad loans and accept all manner of property collateral instead.
Last week the Bank of Spain had to bail out Caja Castilla La Mancha (CCM), a regional savings bank from the Castilla La Mancha region. It was the first time in this crisis that the Government has had to save a Spanish lender. It won’t be the last.
What it also means is that banks and cajas aren’t going to start lending freely again to home buyers anytime soon. They’ve got a big problem on their balance sheets to deal with first.
Without easy mortgage credit, the average price of property in Spain will continue falling.
Which is not to say that certain types of property won’t go up, but that’s another story.