Europe is threatened by an acute crisis in Spain’s banking system and predictions seen by Channel 4 News suggest a 50 per cent fall in house prices could force Spain to seek an international bailout.
The focus of the crisis in Spain’s financial system is Bankia, a bank made from the forced merger of seven bankrupted savings banks, known as cajas.
The cajas were broken by a decade of reckless lending, to fund property developers in Spain’s building boom. Combining them into Bankia hasn’t solved the problem.
The government has already taken a 45 per cent stake in Bankia, and will today have to find as much as 15bn euros more to restore the bank to something resembling financial health.
But analysts increasingly fear that Bankia’s woes are merely the beginning of the crisis of Spanish banking. Because while many of the bad loans to property developers and commercial property have been recognised, a mass of bad lending to homeowners still hasn’t been accounted for.
And when it is, the results will be catastrophic.
Research by the boutique investment house Variant Perception suggests that house prices in Spain will fall as far as 50 per cent below their peak values.
This would be a disaster for anyone owning a home, especially those with large mortgages. But the banks are dealing with this problem in a surprising way – trying to hide it.
“Many of the Spanish banks didn’t want to take losses so if someone couldn’t pay their mortgage they were offered a modification,” says Jonathan Tepper, an economist at Variant Perception.
“That might be paying a lower rate, having the mortgage extended – if they didn’t pay it wasn’t a problem. So that’s one way they’ve hidden their losses. As the Americans say – a rolling loan gathers no loss”.
While capital is being tied up in bad residential loans, it can’t be released to industry. So investment is choked, and unemployment and economic stagnation worsen.
A large part of the housing stock in Spain is owned by the banks themselves. And in some cases, they are offering 100 per cent interest-only loans on those properties, as long as buyers pay the old, inflated prices.
The day of reckoning may not be postponed forever. The banks argue that Spanish borrowers have an excellent repayment record, despite soaring unemployment.
But Jonathan Tepper argues that this has achieved by a combination of temporary factors. When workers in Spain are made redundant they enjoy relatively generous unemployment benefits for a period of up to two years.
This, combined with the forbearance of the banks, may be delaying the impact of soaring unemployment on residential property prices.
His ideas are increasingly echoed by globally-renowned financial institutions such as JP Morgan and Fitch, and the international view of Spain’s banking sector is growing ever more pessimistic.
If this analysis is correct, it would have dire consequences for Spain. Bankia is already been bailed out, and the balance sheets of other Spanish banks are seriously stretched.
A massive increase in bad mortgage debts would force many of them to request a bailout from the Spanish government, which itself could be forced to request a bailout from the IMF.
But the consequences of artificially delaying the readjustment of Spanish house prices could be worse. While capital is being tied up in bad residential loans, it can’t be released to industry. So investment is choked, and unemployment and economic stagnation worsen.
As Jonathan Tapper points out: “Had the banks recognised their losses early on, certainly there would have been pain, but credit can start flowing again. Essentially, they’ve wasted five years”.