The Pain In Spain

I've talked about the Greek Fire spreading to Ireland, Britain, Portugal, and Italy.  The latest target in the ongoing European financial crisis is now Spain, where five banks have failed the latest round of bank stress tests.

Five Spanish lenders, including Banco Pastor SA (PAS) and Caja de Ahorros del Mediterraneo (CAM), failed this year’s round of European Union stress tests after regulators found they didn’t have enough capital to withstand a recession scenario.

Unnim and CatalunyaCaixa, two Catalan savings banks groups, and Grupo Caja3 also failed the tests under the main results category set by the European Banking Authority, according to results published on the websites of Spain’s commercial and savings banks associations. The banks, which were short a combined 1.56 billion euros ($2.2 billion) of capital, according to the EBA, won’t need to raise funds because they have extra reserves and bonds that convert into shares to absorb losses, the Bank of Spain said.

Spanish lenders make up more than a quarter of the 90 European institutions tested by the EBA as banks and regulators step up efforts to convince investors they can withstand a three-year property crash and soaring funding costs. The government earlier this year imposed new minimum capital requirements to speed up mergers of struggling lenders as the Bank of Spain also forced them to report more details of loans linked to real estate. 

As Spain's version of the US housing depression continues,  Spain's banks are deep in the red from loans gone bad.  Spanish law doesn't allow homeowners to walk away from mortgages, and that's the only thing keeping Spanish banks from immediately imploding.

Similar to Ireland, whose credit rating was cut to non- investment grade this week by Moody’s Investors Service, Spain’s economic crisis was driven by a credit-fuelled property bubble that burst. The housing boom that ended in 2008 left Spanish banks with 313 billion euros ($441 billion) in loans related to real estate activity as of June, according to the Bank of Spain.

The number of foreclosed homes advertised by Idealista.com, Spain’s largest real-estate website, has risen 10-fold to 30,000 in three years. The properties are valued at about 4.6 billion euros and owned by 40 banks.

“If the banks had to assume all the losses resulting from the bad mortgages they granted during the property boom, the whole financial system would collapse,” Jesus Encinar, Idealista.com’s chief executive officer, said in an interview. 

That's leaving Spanish homeowners and taxpayers with the bill, and they're angry.  Very, very angry.  To the point where Spanish politicians are scrambling to provide homeowner relief legislation before elections in 2012.  They're passing more of the pain in Spain to the banks, but now that's revealed the foundation of sand that these banks are built on.  In other words, Spain's in real trouble.

If you thought the US housing bubble was bad, the Spanish one was far worse.  Real estate prices more than tripled across the country from the late 90's.  It was like California here, only across the entire country.  Foreclosures are now flooding the market and driving housing prices down further, and Spanish foreclosure laws are leaving people homeless and still owing tens, if not hundreds of thousands of euros to the banks.  Spanish banks got even greedier than the US ones, making subprime loans to people they knew couldn't pay.  The result is that homeowners and banks are going to be hurting badly for years.

Spanish banks may need to raise as much as 4 billion euros of extra capital if homeowners are given the right to cancel mortgage contracts without being saddled with the debt, according to New York-based management-consulting firm Oliver Wyman. This could force lenders to add 400,000 unwanted properties to their balance sheets.

Home prices may fall by an additional 20 percent in the next four years before bottoming out, R.R. de Acuna & Asociados, a Madrid-based real-estate consulting firm, said at a briefing last month. The company estimates there are about 1.5 million unsold homes, which won’t be absorbed for another six years. 

In other words, the Spanish economy is completely screwed and will remain that way for a very long time.  It's going to be an anvil around the EU's neck, and it may be enough to pull the entire bloc under.