CajaSur nationalization makes fragility of Spain’s banks topical

Last spring and summer I wrote a series of articles on the bleak situation in Spain, centred on the Spanish Cajas (savings banks), the imploded housing market and the high level of unemployment. The gist of these posts was that Spain faced an uphill battle since the jobs market was in a world of hurt and Spain’s Cajas were hiding billions in real estate losses via forbearance.

The problems with the Cajas, who have been frequent users of ECB liquidity, became urgent during the depths of the recession in March 2009 when Caja Castilla La Mancha was rescued. By April, reports that Spain’s savings banks may have 40 billion in writedowns were widespread. For me, it was revelations last July about GMAC and Hypo-Real-Estate’s speculations in the Spanish mortgage market that made it clear how deep the forbearance problem was. GMAC was selling Spanish mortgage assets for 14.5 cents on the dollar while Spanish house prices had only fallen 13%. I asked “What does that tell you about likely losses in the Spanish banking system going forward?”

Well, with the nationalization of CajaSur, the forced merger of two Cajas and the forced merger of yet four other Cajas this week, we have the answer. Now, the Spanish are moving forcefully to clean this mess up. But clearly, there are a lot of dud assets on Spanish banks’ books – just as there are on the books of banks in the US or Germany or Ireland to name a few conspicuous countries. As I have been saying for a while, all of these problems didn’t magically disappear, they have been lurking, waiting for economic weakness to re-assert themselves.

The question for me, with Spanish austerity and all, is how is Spain going to prevent this from spiralling out of control? I mean, now that a lower growth path is all but assured, this has to drive unemployment, foreclosures, and non-performing loans higher. From where I sit, this looks like a situation which will get worse, not better. Can someone explain to me what I am missing here?

Video below.

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  1. Coldcall says

    You are’nt going wrong anywhere! Good analysis, thanks Edward.

    Having lived in Spain for many years on and off, i was always sceptical when i heard analysts in 2008 saying Spain’s banks were all in great shape because they had not been deep in US subprime.

    Anyone who has run a business in Spain knows how hard it is to collect invoice payments in the best of times say 2002-2007. Up until recently one had to hire a “cobrador” which is basically a debt collector. No he wont go around breaking legs, he just goes to the debtors offices and nags him until he pays the bills.

    So in 2006/7 when i saw these cajas and foreign banks offering crazy HP and mortgage deals, in many cases accepting the flimisest of proof of earnings, i knew this would collpase on itself one day. So it was really ironic listening to how supposedly the Spanish were not involved in US subprime when they had their own homegrown subprime problem just waiting to blow. I think things are probbaly way worse than any of us really know. Unfortunately the Spanish are use to hiding problems, and little transparency.

    I remain wedded to my view that EMU/politicos, with the connivance of the banks, are responsible for what has happened in most of the PIGS.

    Thats not to say debtors dont share repsonisbility, but its hard for any population to resist easy money when its being thrown at them willy nilly.

    Its a real tragedy.

  2. Coldcall says

    just to add.

    I really wish all these wall st analysts would actually go and spend time in the countries they are covering instead of pronouncing their solvency or insolvency based on government data etc…

    There is nothing like walking around on the ground, on the high streets, seeing how every corner has a different bank on it; to get a good feeling for where an economy is heading.

    Even up to a few months ago many analysts were still hyping Spanish financial sector. Its unbelievable.

    1. Edward Harrison says

      My question is about Santander and BBVA. While the Cajas were knee-deep in poor lending, the thought is that BBVA and Santander were much better managed – sort of like HSBC or JPM.

      As for the savings banks, the thinking is that the mergers will give them some cost savings which will bolster the companies. This is the sort of thing we saw in Germany in 08 and 09 when their state banks went bust. This strikes me as a distinctly Japanese solution.

      I still am trying to figure how Spain (or Ireland with the same problems) gets out of this mess without a collapse of their banks. At least the Spanish don’t have the degree of explicit bank guarantees. That should help their sovereign debt.

      1. Coldcall says

        I dont know. I’ve also heard that they are supposedly not as exposed to the Spanish mortage, and property development sector as are the Cajas. While that may be true to some extent, it is said that the Cajas make up for about 50% of the bad loans to developers and on mortgages. So someone else must own the other 50%. One of those is DB, and i would assume Barclays’s Zaragozano is another. But surely both BBVA and Santander did not sit on the sidelines of the Spanish proeprty boom? Its their home market after all.

        1. Edward Harrison says

          Exactly. They obviously have a decent amount of exposure, though they were more picky like JPMorgan Chase versus a Washington Mutual or Zions in the US or a Lloyd’s versus an HBOS or Bradford and Bingley in the UK.

          I think a lot of the residual exposure is foreign though because of the German banks and others speculating in Spanish mortgages. That’s what the GMAC/HRE post was about. This is why I don’t think the German really understand the interconnectedness. Their banks have exposure everywhere. Spanish property, Greek sovereign debt, US subprime, US commercial property. This is where the contagion will come from – via the interlocking global financial arrangements.

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