squeeze kicked in with a vengeance. Now almost 1m unsold homes sit vacant across the country. Prices of existing homes in Barcelona and Madrid have fallen by up to 10% in the past year. Mr Encinar reckons that average prices will fall by up to 50% in nominal terms (though rather less in real terms) before they stabilise.
The first casualties have been estate agents. In Malaga at the peak there were more estate agents than hairdressers, says Mr Encinar. Half those offices have closed in the past year. The next victims are the property companies. The biggest, Martinsa-Fadesa, collapsed in July, owing €5.2 billion, the largest bankruptcy in Spanish history. Others are in trouble, partly because they are sitting on land banks of uncertain value. Then come the cajas. The average of overdue loans in the financial system has already climbed to 2.5% of all loans; for the cajas the figure is 2.9%. José Viñals of the Bank of Spain, the central bank, insists: “We don’t see any financial entity whose viability is compromised.” But he adds that banks and cajas will have to adjust their cost structures to slower growth. Mr Zapatero has said that some cajas should merge and that the government should help them to do so.
A private banker is blunter. He expects the coming recession to reshape the Spanish financial system, as did the recessions of the early 1980s and early 1990s. He reckons that around a dozen of the smaller cajas, mainly on the Mediterranean coast, will have to be bailed out by merging with stronger ones, perhaps with government support. Some smaller banks may be sold to foreign institutions.
If the damage turned out to be no worse than that, it would be tribute to the strength of Spain’s financial system. So far there has been no Spanish equivalent of Northern Rock, a British mortgage lender that had to be nationalised, let alone a Fortis or a Lehman Brothers or AIG. That is because those earlier recessions and their attendant bank collapses bequeathed both sound regulation and relatively conservative banking practices. As the financial boom got under way, the Bank of Spain introduced a countercyclical element to loan-loss provisioning. “We think that risk arises not when a loan becomes overdue but when it is granted,” says Mr Viñals. So banks have to set aside a small generic provision when issuing a loan, as a kind of insurance policy. The Bank later obliged any institution setting up an off-balance-sheet Special Investment Vehicle to take a large capital charge—large enough to dissuade them from doing so.
The solid few
After the frantic consolidation of the early 1990s Spain is left with two giant banks, Santander and BBVA;
a handful of middling ones; scores of smaller ones; and 45 cajas. It is the cajas that have the biggest exposure to mortgages and property developers, partly because the two big banks have chosen to grow abroad.
Both Santander and BBVA have a strong capital and deposit base and have largely stuck to commercial banking, eschewing investment banking and derivatives. Spain accounts for only 35% of Santander’s total business. “We’ll clearly see slower growth, an increase in overdue loans and a demand for higher provisions,” says Alfredo Sáenz, the group’s chief executive. The bank has spent €2.5 billion buying assets from its property-company clients as a pragmatic way of reducing bad loans. In some cases it has had to accept a loss on these assets. Against that, margins are widening. Santander’s profits in Spain have been growing at 20% a year. Mr Sáenz expects that figure to remain in double digits, but that will require cost-cutting, including early retirement of some of the bank’s staff.
Spain accounts for 40% of BBVA’s profits (and Mexico for 26%). Francisco González, its chief executive, notes that the bank has generic provisions of €3.5 billion and should be able to deal with an increase in overdue loans without profits being affected. The bank’s net income is still growing at 10%, he says, compared with over 20% last year. “We’re comfortable with our capital position, have a lot of liquidity and relatively good asset quality in relation to creditors,” he adds. “We’ll pass through a storm, there’ll be wounds, but those who emerge will be winners.”
The third-largest financial group is Barcelona’s La Caixa, the biggest of the cajas. Two-thirds of its loans are mortgages and another 12% are to developers and building firms, according to Juan María Nin, its chief executive. But it has a large cash pile,
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is well capitalised and can draw on a portfolio of industrial investments, which includes big stakes in Telefónica, two energy companies, Gas Natural and Repsol, a water utility, Agbar, and a toll-road operator, Abertis. It has recently taken stakes in banks in Hong Kong and Mexico as it seeks to follow the big two banks in expanding abroad.
Mr Nin says that defaults on Spanish home loans will be relatively low, for several reasons. Almost 90% of La Caixa’s mortgages had a loan-to-value ratio of less than 80% in June;
the average was 50%. Spanish banks insist on guarantees;
homeowners and their guarantors remain liable for the mortgage payments even if they hand back the keys of the property. And when workers are laid off they are entitled to unemployment benefits worth 80% of their pay for 18 months.
So the direct effect of the property bust on the financial system
should be containable. But that is not the end of the story of woe. The slowdown in consumption and the international credit crunch is hitting the rest of the economy—and will eventually hurt some banks. Both Spain’s government and its businesses are less indebted than they were last time recession struck, but households are deeper in the red: total household debt is equal to 84% of GDP (still a smaller share than in Britain, Ireland or the Netherlands). No wonder that in the first nine months of 2008 sales of new cars were down 22% on last year.
Though Spanish banks have a strong deposit base, until a year ago they were refinancing some €100 billion a year in the markets, partly by issuing cédulas hipotecarias. These are 15-year covered bonds backed by prime mortgages and guaranteed by the bank’s assets (Spanish banks keep mortgages on their books even after they have securitised the debt). Now they are being confused with subprime mortgages and nobody is buying them, says Guillermo de la Dehesa, the (Spanish) chairman of the Centre for Economic Policy Research, a London-based group. As an alternative the banks and cajas are borrowing from the European Central Bank’s emergency liquidity window, but this is a short-term stopgap. The stronger banks can still issue short-term notes.
Squeezed, not crunched
Both the government and blue-chip companies are finding credit more expensive. Government bonds now attract a risk premium of some 60 basis points (ie, 0.6 %) over their German equivalents, and companies have seen the cost of loans rise by up to three times that amount. So far, however, Spain has faced merely a credit squeeze rather than a full-blown crunch in which credit is no longer available, says Mr de la Dehesa.
That is not how it feels to many businesses, hit by lack of liquidity and slowing consumer demand.
Having previously rejected calls from bankers and businesspeople to inject liquidity into the economy, the government ended up matching rescue measures taken by Britain, the United States and others. Last month Mr Zapatero announced a €50 billion fund to help the banking system. This will buy cédulas hipotecarias and bundles of bank loans, but only those with a triple-A credit rating. The government also raised its guarantee on bank deposits from €20,000 to €100,000. Days later it offered to guarantee up to
€100 billion of bank borrowing this year and an unspecified sum next year, as part of a co-ordinated European effort to ungum the money markets.
The government had already done some fiscal pump-priming earlier. Shortly after the election it
announced a €400 rebate for every taxpayer, half of it paid in June and the other due in December. But falling tax revenues have swiftly pushed the public finances into the red. The draft budget foresees a deficit of 1.5% of GDP this year and 1.9% next. The banking fund will help to push the public debt up to 38.8% of GDP next year.
In September Mr Solbes announced a €3 billion credit line to encourage property companies to let out their empty flats. But that will only slightly reduce the stockpile of unsold homes. Reviving the rental market requires a new law to help landlords.
The sooner house prices fall, the faster Spain will recover from the bust. The housebuilding industry needs to shrink from a swollen 9% of GDP in 2007 to a more normal 5% or so. Mr Solbes says that this
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year 160,000 fewer houses are being completed than in 2007, which alone implies a 1% fall in GDP. Yet each job in the building industry also generated three or four jobs indirectly, says Mr Fidalgo. With housebuilding knocked out as the engine of growth and employment, Spain will have to find something to replace it.
Copyright © 2008 The Economist Newspaper and The Economist Group. All rights reserved.