Thursday, January 27, 2011

Spanish property crash and the Spanish banks

Spanish property crash and the Spanish banks



I found a recent article by El Pais interesting.  This relates to the Spanish savings banks called ‘Cajas’.  These are usually quite small, local institutions  with only a few branches, a bit like the UK’s old building societies.  That said, not all Cajas comprise only a branch or two.  la Caixa (the biggest Caja) is enormous and has about 4,700 branches throughout Spain and some 20,000+ employees.

The problem is that the Cajas are in trouble, so much so that ‘a flurry of forced mergers’ has seen their numbers drop from 45 to 17.  This has been largely due to their exposure to the Spanish property crash and their part in the lunatic lending that was conducted during the Spanish property boom.

Without doubt, the Cajas have been ‘notorious’ for their localism and ‘political’ nature and their troubled situation now has come as no surprise to anyone.  Indeed, I am surprised that they have lasted so long, before the truth behind their debt exposure was revealed. 

Certainly, last year’s banking stress test was laughable to anyone with any knowledge of the effect that the Spanish property crash was going to have on the banks.  It revealed that only a handful of Spanish banks were endangered – when the reality to anyone here, with just a few brain cells working, was so obviously very different.

Of course, the toxic bit for the banks is the amount of new development that they funded.  Some of this is set to go well beyond any sane description of ‘toxic’ and relates to the funding of purchases of rustico (arable) land on the basis that it would be urbanised (redesignated as building land).  Needless to say, this land (sometimes bought at ‘building land’ prices) has sometimes not been redesignated or, if it has, will not be built upon, possibly, for generations.  In effect, therefore, it is virtually worthless…

In the meantime, Spanish property has dropped in value since 2007 by somewhere between 25% – 40% depending upon the segment, the area and the type of property.  This is a huge loss for anyone to sustain and gives some idea of the exposure that the Spanish banks face on any building project that they have funded.

Sadly, the downward vortex with regard to the overall Spanish property market is set to continue, not least because of the (understandable) reluctance of the Spanish banks to lend.  Mortgages are hard to obtain and, until this is reversed, it is difficult to envisage any major reduction in the excessive numbers of properties that were built during the boom – let alone a revitalisation of the market.

Incidentally, I write this not to put you off buying in Spain.  Far from it.  Buy carefully and there is no reason why any purchase should not be sound financially.  However, I very much doubt that you will see much growth in value on any property that you buy – but there are enough bargain priced Spanish property around to make sure that you can easily absorb any further downturn in the Spanish property market.

In this regard, I still see a further drop in overall values this year but nothing like that posited in the El Pais article when it quotes: ‘the hypothetical downturn…’.  The figures there are, I am sure, still based around the Spanish government’s ludicrous claim that Spanish property prices have only dropped, since the boom, by about 12%!  This is an asinine fallacy and one that the Spanish government needs to clear up as soon as possible.  The biggest drops in Spanish property values have long since occurred, the Spanish government needs to acknowledge this fact openly and allow the international community to then base their analysis and future predictions on this data – rather than the ridiculously defensive 12%.

RELEVANT INFO:  The prospects for the Spanish economy look grim and mortgages in Spain, Spanish banks and the Spanish property crash and buy carefully and bargain Spanish property and bank fund lures investors with caja reform plan.

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