Spanish banks and savings banks, known as cajas, largely dodged the US subprime mortgage debacle, leading to a bad case of smugness in certain government and banking circles. Now, however, Spanish banks, and in particular cajas, are having to cope with their own, home-made toxic assets thanks to foolish lending to developers during the boom. The smugness has gone, and there is egg on some faces.

In March last year, when smug people still thought Spain would dodge the economic crisis, bad debts from loans to developers stood at 2.9 billion Euros. Fast forward one year and the crisis has got its teeth deep into Spain. According to figures from the Bank of Spain, developers’ bad debts had exploded to 21.5 billion Euros by March this year, an increase of 750% in just 12 months.

It gets worse. By every indication bad debts will just keep growing, with no sign of a bottom anytime soon. Developer bad debts as a percentage of total bad debts are now 30%, having never been more than 10%, even in the last bust.

Added to which, those non-performing loans would be considerably higher were it not for the fact that lenders have renegotiated billions of Euros of loans in some cases, and accepted debt for asset swaps in others (known in Spain as ‘dación en pago’). The true non-performing loan figure for developers is much higher than the 7.57% declared by the Bank of Spain. “If it wasn’t for those measures, the general rate of bad debts could be 2 points higher by now,” one expert told the Spanish daily ‘El Pais’. Another described it as the “tip of the iceberg”.

As the level of bad debts explodes, weaker Spanish lenders are coming under strain. The news these last few days has been dominated by talk of bank bailout and rescue measures, especially for the cajas. So far only Caja Castilla La Mancha (CCM) has needed a bail out. It may well not be the last.