‘Spain is now a country with a million unsold properties [and] hundreds of housing developments left unfinished.’ Photograph: Arturo Rodriguez/AP
Spain’s banking crisis did not come out of the blue. In the 1990s the Spanish suffered a bout of collective madness. Interest rates fell from 14% (with the peseta) to 4% (with the euro) in a matter of weeks. In 1998 the centre-right government passed a law that significantly increased the amount of land for development. Developers got rich, selling the idea that everyone was going to win because property would always go up – never down – in value. German banks financed Spain’s savings and commercial banks, which needed extra funds for high-risk mortgages. Greed made us rich for a while – but then it made us poor, and jeopardised our future.
This is now a country with a million unsold properties; hundreds of housing developments left unfinished by construction companies and real estate promoters, especially along the Mediterranean coast but also in city centres; 4.7 million people unemployed and an unemployment rate of 24.5% overall, and 50% in the 18–25 age bracket – and that’s without including the student population. The situation of «extreme difficulty» described this week by the prime minister, Mariano Rajoy, has at its root the flats that the banks accumulated when people started defaulting on their mortgages.
As in other countries that experienced bubbles, such as the US and Ireland, it began with a fondness for real estate speculation and a belief that property values would never cease to rise. To be sure, the euro was an incentive for foreign investors eager for a piece of the real estate pie, but this could not stop the bubble from bursting and housing prices from dropping. We should have distinguished currency value from property value; some foreign investors preferred to invest in euros instead of risking their money in countries such as the Balkans.
All of these bubbles were like fires lit by greed: you could buy a flat on the Mediterranean coast (or in a city) for £100,000 and sell it the next day for £150,000; by the end of the month it was worth £250,000. And meanwhile, the flat, purchased off-plan, was still being built. The last buyer still believed that prices would never stop spiralling upward. All this began in 1998, and the bubble burst in 2007. Nine years of speculative madness (10, in Japan).
Banks have now discovered that their balance sheets were filled with non-performing loans and toxic assets: urban land, unfinished housing developments, unpaid real estate loans to developers, and so on.
The total assets of Spain’s banking system amount to about €3tn. The net amount of toxic assets – unsold real estate valued market to market – is not known for certain. We do know, however, that, bar the country’s three largest banks (BBVA, Santander and CaixaBank) and a handful of medium-sized commercial banks, the system needs to be recapitalised. Delinquency rates are increasing, to 9.5% on average and as high as 19% at some banks. The banks need to increase their tangible capital (equity) to €100bn, and the government does not have enough funds for a tough restructuring or a bailout (of the kind applied swiftly by Gordon Brown in the UK four years ago).
At a recent press conference, Mario Draghi, the European Central Bank chief, insisted that the ECB would not force any country – a reference to Spain, no doubt – to request a bailout or a full intervention. Showing his sense of practicality, he urged all countries to assess their particular financial needs and act accordingly. He also pointed out – in an oblique reference to calls for the ECB to once again intervene in the sovereign debt market by buying Spanish government bonds to drive up prices and bring down the risk premium relative to 10-year German bonds – that it is not the ECB’s place to take on roles best played by others.
A less drastic eleventh-hour proposal now appears feasible: the European stability mechanism could provide support to Spanish banks that require recapitalisation, but the Spanish treasury would be responsible for taking measures to guarantee these bailout funds. As this would be only a partial bailout, Spain would not have to meet the stringent obligations imposed on the three countries bailed out to date: Ireland, Greece and Portugal.
Just days after the Spanish finance minister declared that the markets were closed to Spain, he managed to raise over €2bn from the bond markets – though at a higher interest rate, not a good sign. The main problem right now is politics. Spain’s centre-right government has been delaying the inevitable: asking the ECB and the Eurogroup of finance ministers for ESM funds to cover a partial bailout of the country’s under-capitalised banks. Tomorrow’s conference call among eurozone members to discuss a possible bailout must bear fruit. No less than €100bn is needed, at least according to two foreign audit firms. Germany, it seems, opposes this kind of bailout because the ESM requires new rules, to be approved, possibly, in the next few months.
The referendum and general elections in Greece may be highly contagious to Spain’s banking system. Spain could be forced to pay an even higher interest rate, and its banks would not be able to afford to take on debt. Eventually, the same could happen in Italy. In this country we favour a mutual eurobond system, a new European fiscal compact and a real European banking system – that is, more euro and fewer national markets. But our politicians need to ensure this comes about as swiftly as possible.
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Spain’s banking crisis did not come out of the blue. In the 1990s the Spanish suffered a bout of collective madness. Interest rates fell from 14% (with the peseta) to 4% (with the euro) in a matter of weeks. In 1998 the centre-right government passed a law that significantly increased the amount of land for development. Developers got rich, selling the idea that everyone was going to win because property would always go up – never down – in value. German banks financed Spain’s savings and commercial banks, which needed extra funds for high-risk mortgages. Greed made us rich for a while – but then it made us poor, and jeopardised our future.
This is now a country with a million unsold properties; hundreds of housing developments left unfinished by construction companies and real estate promoters, especially along the Mediterranean coast but also in city centres; 4.7 million people unemployed and an unemployment rate of 24.5% overall, and 50% in the 18–25 age bracket – and that’s without including the student population. The situation of «extreme difficulty» described this week by the prime minister, Mariano Rajoy, has at its root the flats that the banks accumulated when people started defaulting on their mortgages.
As in other countries that experienced bubbles, such as the US and Ireland, it began with a fondness for real estate speculation and a belief that property values would never cease to rise. To be sure, the euro was an incentive for foreign investors eager for a piece of the real estate pie, but this could not stop the bubble from bursting and housing prices from dropping. We should have distinguished currency value from property value; some foreign investors preferred to invest in euros instead of risking their money in countries such as the Balkans.
All of these bubbles were like fires lit by greed: you could buy a flat on the Mediterranean coast (or in a city) for £100,000 and sell it the next day for £150,000; by the end of the month it was worth £250,000. And meanwhile, the flat, purchased off-plan, was still being built. The last buyer still believed that prices would never stop spiralling upward. All this began in 1998, and the bubble burst in 2007. Nine years of speculative madness (10, in Japan).
Banks have now discovered that their balance sheets were filled with non-performing loans and toxic assets: urban land, unfinished housing developments, unpaid real estate loans to developers, and so on.
The total assets of Spain’s banking system amount to about €3tn. The net amount of toxic assets – unsold real estate valued market to market – is not known for certain. We do know, however, that, bar the country’s three largest banks (BBVA, Santander and CaixaBank) and a handful of medium-sized commercial banks, the system needs to be recapitalised. Delinquency rates are increasing, to 9.5% on average and as high as 19% at some banks. The banks need to increase their tangible capital (equity) to €100bn, and the government does not have enough funds for a tough restructuring or a bailout (of the kind applied swiftly by Gordon Brown in the UK four years ago).
At a recent press conference, Mario Draghi, the European Central Bank chief, insisted that the ECB would not force any country – a reference to Spain, no doubt – to request a bailout or a full intervention. Showing his sense of practicality, he urged all countries to assess their particular financial needs and act accordingly. He also pointed out – in an oblique reference to calls for the ECB to once again intervene in the sovereign debt market by buying Spanish government bonds to drive up prices and bring down the risk premium relative to 10-year German bonds – that it is not the ECB’s place to take on roles best played by others.
A less drastic eleventh-hour proposal now appears feasible: the European stability mechanism could provide support to Spanish banks that require recapitalisation, but the Spanish treasury would be responsible for taking measures to guarantee these bailout funds. As this would be only a partial bailout, Spain would not have to meet the stringent obligations imposed on the three countries bailed out to date: Ireland, Greece and Portugal.
Just days after the Spanish finance minister declared that the markets were closed to Spain, he managed to raise over €2bn from the bond markets – though at a higher interest rate, not a good sign. The main problem right now is politics. Spain’s centre-right government has been delaying the inevitable: asking the ECB and the Eurogroup of finance ministers for ESM funds to cover a partial bailout of the country’s under-capitalised banks. Tomorrow’s conference call among eurozone members to discuss a possible bailout must bear fruit. No less than €100bn is needed, at least according to two foreign audit firms. Germany, it seems, opposes this kind of bailout because the ESM requires new rules, to be approved, possibly, in the next few months.
The referendum and general elections in Greece may be highly contagious to Spain’s banking system. Spain could be forced to pay an even higher interest rate, and its banks would not be able to afford to take on debt. Eventually, the same could happen in Italy. In this country we favour a mutual eurobond system, a new European fiscal compact and a real European banking system – that is, more euro and fewer national markets. But our politicians need to ensure this comes about as swiftly as possible.
• Follow Comment is free on Twitter @commentisfree
