“The real estate sector is bankrupt”. That is the claim made yesterday by Mr. Santos González Sánchez, President of the Spanish Mortgage Association (AHE), speaking on behalf of Spain’s mortgage lenders. This has serious implications for the Spanish banking sector and the wider economy.
Spanish developers had a combined debt of 324 billion Euros in the third quarter of 2009, the equivalent of around 30% of Spanish GDP, according to figures from the Bank of Spain. The interest bill alone is around 15 billion Euros a year, which developers cannot hope to pay.
With property prices falling, the banks are increasingly reluctant to swap debt for property. They are said to be ready to turn off the taps and refuse developers more credit, fearing that it could become a downward spiral.
More than 50% of the debt was used to buy land, for which there is now no market. “Whilst those plots of land are not properly valued, the financial system can’t start afresh, and won’t be able to finance new homes,” Mr. González told the Spanish press.
“The viability of the property sector is in question and it is putting the financial sector in danger,” warns Mr. González, who called on “someone” like the banks, the Government, or the Bank of Spain to take a lead in tackling the problem. All of them are said to be aware of the danger, but all of them are looking the other way.
“Bad Bank” solution
The solution lies in creating a “bad bank” where all the toxic real estate loans can be dumped, freeing the banks from their bad debts and enabling them to start lending again, argues the AHE.
Worst of all, the situation with the developers is pushing up the cost of credit for the whole Spanish economy, through lower bank credit ratings, argue the AHE. “The developers’ debts affect the credit ratings of the financial institutions, with all the consequences that has for a sector that still hasn’t fully recovered its liquidity. The financial system will have to explain how long it can bear this situation,” said Mr. González.
This serves to remind us that, on the whole, the Spanish property sector is far from out of the woods, and the longer the problem drags on, the more damage it does to the Spanish economy.