Every country has a problem child or two in the financial services sector. America has Citigroup and Bank of America. Britain has RBS and HBOS/Lloyds. And Germany has Hypo Real Estate.
I have been chronicling problems at the real estate lender on this blog for some time now and last posted on HRE in April (“HRE: defusing the German financial time bomb”). Back then, the German government was looking to step in and effectively nationalize the company. Subsequently, on June 23rd, Hypo Real Estate warned of heavy future losses. Having already received €100 billion in support from the government, you could be forgiven for thinking HRE is a bottomless pit.
Now that the company is a ward of the state, taxpayers are on the hook for another 10 billion. But, Hypo Real Estate’s plight reveals stresses in Spain as well. Ambrose Evans-Pritchard reports.
"The bank clearly has a solvency problem," said Michael Endres, head of the board in an interview with Welt am Sonntag. "It wouldn’t surprise me if a capital injection of €10bn proved insufficient."
Meanwhile, the extent of credit damage in Spain is becoming clearer after America’s GMAC revealed that it had been selling Spanish mortgage assets at 14.5 cents on the dollar as it withdraws from global ventures to focus on the US home market.
Until now, it has been hard to measure the extent of the "haircuts" being suffered on Spanish mortgage securities since there is no obvious gauge such as the ABX Index used to track sales prices on US subprime and Alt-A debt.
The GMAC sales suggest that Spain’s property crash will inflict large losses on foreign creditors, mostly from Germany and France. The Spanish government has long insisted that higher credit standards in Spain have spared the country the sort of debacle seen in the US.
Hypo Real’s Mr Endres said earlier management had expanded at breakneck speed in foreign markets that they never understood, wading cluelessly into US housing through its Dublin operations. "The property market is like farming: you don’t buy a field until you have walked around it a few times," he said.
First of all, I would love to know what GMAC is doing in the Spanish mortgage market. Considering GMAC just got a second bailout in May, American taxpayers have the right to know what GMAC is doing and where.
The revelation of GMAC’s involvement also makes clear how intertwined the global financial system is – an American auto lender gets a bailout and then dumps Spanish mortgage assets for a ridiculously low price. These losses make clear that a reckless German real estate company speculated away billions in the same foreign market, turning it into a government-owned company and requiring yet more money from German taxpayers.
But, I should also add that 14.5 cents on the dollar is extremely low given the fact that Spanish house prices have only fallen 13% to date (see my post “House price declines accelerate in Spain”). What does that tell you about likely losses in the Spanish banking system going forward?