Whats wrong with Spanish Banks (part 2)

Initially, the lending to Spanish developers was based on using the land and the properties themselves as security. But, as the boom continued, the lending became increasingly speculative with Spanish banks lending money to companies or businessmen to buy shares in other Spanish property companies and, in return, using shares in these companies as security. At the same time, consumer lending, both Spanish mortgages and personal loans, continued to boom.

Unfortunately, as the credit crisis took hold, the house of cards collapsed. In the last twelve months virtually every major Spanish property company, quoted or private, along with a myriad of smaller developers, have either had to: enter into creditor protection schemes, e.g. Fadesa Martinesa, Habitat; negotiate debt for equity swaps, e.g. Metrovacesa, Colonial; or attempt to re-negotiate their debt. Assets sales and restructurings are rife and the banks and cajas are now the biggest owners of property in Spain. Combine this with falling property values (and sales), unemployment scheduled to reach 4 million this year and many customers who cannot afford to pay their mortgages, and the problem is evident.

For example, in February of this year, bad debts accounted for over 4.13% of loans and this is expected to rise to over 6.0% by the year end. As the economic environment deteriorates further, lenders are re-negotiating mortgage terms with borrowers to avoid having to make further provisions.

In truth, it is the cajas that have the biggest problem due to their over exposure to both developers and consumers and last month the government had to rescue Caja Castilla La Mancha. It is not expected to be the last and similar rescues are expected in the coming months. At the same time, in May Moody’s, a leading credit rating agency, announced that it is studying the potential downgrade of 32 Spanish banks and cajas due to their deteriorating balance sheets and high levels of bad debt.

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