There was an interesting article yesterday in the FT/alphaville column, entitled “The slow death of the Cajas”, about the liquidity problems facing Spain’s regional savings banks, or cajas. The article didn’t go into it, but this has big implications for the property market.

Cajas in Spain tend to be controlled by local politicians and their cronies. So forget the ‘efficient allocation of capital’, cajas in Spain are mainly about the pursuit of political goals and patronage. That is why they lent to developers in the boom with such alacrity; in the short term it meant more jobs, thus more votes for the incumbents (not to mention back scratching between developers and politicians). As a result the cajas are massively over-exposed to the Spanish property sector.

Now the chickens are coming home to roost. The loans are turning bad, whilst the real estate collateral is under water and sinking fast, so the cajas can’t liquidate to recoup their loans without a severe haircut.

It also means that many cajas are stumbling towards a liquidity crunch. In the good years they funded operations with borrowing from abroad, then from the ECB when the credit crunch struck. But now what? Where will the money come from? Deposits? Pull the other one. A government bail out? With the deficit already exploding, I can’t see how the government could afford it, though the FT article does point out that the “lending shortfall is already being taken up by state-backed institutions, such as ICO. Not exactly the most kosher way to assuage Spain’s fiscal deficit concerns.”

Fire sale

At some point the cajas might have to start dumping real estate assets at whatever price they can get, just to scrape together some cash. Let’s hope not all at the same time, which would just drive prices down even further, in a classic downward spiral.

So thanks to reckless and politically-driven lending during the boom, the fate of the cajas is inextricably bound up with the property market. As cajas get ever more desperate for money the pressure will grow on them to flog real estate assets for whatever they can get. That might mean recognising losses and risking balance sheet insolvency, but if the alternative is running out of money…..they are ‘entre la espada y la pared’, as they say in Spain (between the sword and the wall).

All of which means there may be a lot more distressed Spanish property in the pipeline, depending on how the cajas weather the storm. I’ll be keeping a close eye on the situation. Keep tuned if you want to know what happens, and where the opportunities are.