The Bank of Spain is expected to increase the provisions it demands of Spanish lenders to cover property bought from struggling real estate developers. The central bank’s move would further dent bank profits already hit by economic recession, according to financial sources and bank analysts. In November, the central bank raised its provisioning requirement from 10 per cent of the property’s value to 20 per cent for real estate held more than a year, and is now expected to raise it to 30 per cent. However, it has yet to notify lenders formally. “No decision has been taken yet,” the Bank of Spain said on Monday. The probable change reflects a growing awareness among regulators and investors that Spanish banks and cajas, the unlisted savings and loan institutions, have massaged their bad loan ratios by refinancing property developers in exchange for Spanish property and equity in the companies, instead of allowing them to collapse. Iberian Equities, the broker, estimated on Monday that listed Spanish banks had property assets of more than €12.6bn ($17.1bn) at the end of last year, while the cajas held €33bn. Santander and BBVA, the two biggest banks, have taken impairments of about 30 per cent. But the proposed increase in provisioning requirements would amount to €1bn, or a fifth, of 2010 profits for smaller banks, and €5.3bn-€5.9bn, or a fifth, of profits for the cajas, Iberian Equities said. A flurry of recent debt-for-assets and debt-for-equity swaps – involving developers including Colonial, Reyal Urbis and Metrovacesa – has deepened the scepticism of analysts and investors about the true bad loan positions of Spanish lenders. Total exposure to developers is €324bn. “While banks’ doubtful domestic loans have risen quickly over the last two years, the recognition of impaired assets has been far slower than the severity of the recession might otherwise suggest,” wrote Jamie Dannhauser of Lombard Street Research. There are particular suspicions about the way the collective bad loan ratio of the cajas has reached a plateau and started to decline, down to 5.05 per cent of assets in December. That is only slightly higher than the 5.02 per cent figure for the banks, whose accounts are generally more transparent. If the numbers were correct, that would be the “best news on the Spanish economy I’ve heard for a long time”, said Luis Garicano, professor of economics and strategy at the London School of Economics, in a blog on Spain. “Personally, I don’t believe it. The alternative is that the bad loan numbers of the cajas don’t make a lot of sense.” Prof Garicano said it would not be possible to re-establish the credibility of the financial system if the regulator permitted “these accounting games”. The Bank of Spain’s expected tightening of its provisioning requirements could go some way towards defusing such criticism. Story from FT.com

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Spanish Banks Face Higher Provisions

In a somewhat shocking and worrying statement, a leading Spanish lender has declared the country’s real estate sector is ‘bankrupt’. According to Santos Gonzalez Sanchez, president of the Spanish Mortgage Association who speaks on behalf of the country’s mortgage lenders, there is so much debt in the industry that finance for property development has effectively dried up. ‘The real estate sector is bankrupt,’ he said, pointing out that Spanish developers had a combined debt of €324 billion in the third quarter of 2009, the equivalent of around 30% of Spanish GDP, according to figures from the Bank of Spain. The interest bill alone is around €15 billion a year. More than 50% of the debt was used to buy land for which there is now no market. ‘Whilst those plots of land are not properly valued, the financial system can’t start afresh and won’t be able to finance new homes,’ Gonzalez told the Spanish press. ‘The viability of the Spanish property sector is in question and it is putting the financial sector in danger,’ he warned. Gonzalez added that something drastic needs to be done. He said that the Government or the Bank of Spain needs to take a lead in tackling the problem instead of ‘looking the other way’. Some experts believe that Spain needs to create a ‘bad bank’ where all the toxic real estate loans can be dumped, freeing the banks from their bad debts and enabling them to start lending again. Gonzalez also warned that the situation has wider implications as the situation with the developers is pushing up the cost of credit for the whole Spanish economy. ‘The developers’ debts affect the credit ratings of the financial institutions, with all the consequences that has for a sector that still hasn’t fully recovered its liquidity. The financial system will have to explain how long it can bear this situation,’ he added. Experts are also warning that Spanish banks may have to deal with a tidal wave of repossessions this year, with big implications for the property market. The auctions banks normally use to dispose of repossessions are struggling to attract buyers, as the credit crunch has hit even the opportunists who traditionally bought at auction. Spain’s General Judicial Council forecasts 180,000 foreclosures this year, up from 114,958 last year. With few buyers at auction, banks will have to take back the properties onto their books at the write-off price of 50% of valuation, which implies recognising a loss. That could have big implications for the banks and the property sector in general. The big question is what impact this new batch of repossession, the equivalent of 15% to 20% of the current inventory of property for sale, will have on the market. These properties could end up dumped on the market at write off values that will send prices down. Story from Property Wire

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Spanish Property Industry ‘Bankrupt’?

According to data released today by the National Statistics Institute (INE), the number of home mortgages issued during November 2009 was 52,043, representing a growth of 1.8 percent over the same month in 2008 and the first recorded rise since April 2007. The volume of loan capital amounted to 6010.5 million, 10.1% less than the same month in 2008, which means that the average amount borrowed fell by 11.7% to 115,492 euros. Despite the rebound year in November, the cumulative comparison of January and November 2009 to the same period in 2008 showed an overall decrease of 23.2%. Savings banks granted the most mortgages (52.2%), followed by banks (36.6%) and other financial institutions (10.9%). As for borrowed capital, savings banks granted 45.3% of the total, banks provided 43.0% and other financial institutions contributed 11.7%. The average interest rate of savings banks was 4.25% and the average term was 23 years, while in banks, the average rate was 4.03% and the average term was 21 years. The variable interest mortgage remains the preferred option in 95.2% of mortgages, compared with only 4.8% opting for fixed rate. The Euribor was reported as the reference rate that was used in 88.7% of the mortgages. The data also shows that in November, 40,156 mortgages had their conditions changed, 35.3 percent more than last year – 32,379 of these were changes in the conditions of a mortgage with the same institution (42.4% higher), mostly being attributed to mortgage payers taking advantage of lower interest rates and longer terms. Story from Kyero.com Live

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New Mortgages Rise For First Time in 18 Months

The Bank of Spain has found indicators of improved activity in the fourth quarter. They believe that consumption indicators eased their retreat in October and highlights that car registrations stepped up their advance in November. However, the bank still believe that the data about the evolution of the activity is still “limited”, according to its latest economic bulletin. If so, GDP could continue moderating in the fourth quarter and improve the figures recorded between July and September, reflecting a year decrease of 4%. The Bank of Spain believes that consumption indicators eased their retreat in October and highlights that car registrations stepped up their advance in November, boosted by the effects of Plan 2000E. It notes that the most recent indicators of investment are “less negative”, while construction investment figures continue to reflect the process of “severe adjustment”. At the same time, exports moderated their rate of decline, year on year, in October, while the pace of decline in imports continued to “fade” in the tenth month of the year. The bank, governed by Miguel Angel Fernandez Ordonez, also noted “slower decline ‘in tourism at the beginning of the fourth quarter and that, under the Hotel Occupancy Survey (HOS) foreign overnight stays fell by 5.6% in annual terms in November, four points less than in the third quarter. On the supply side, the Bank of Spain notes a slowing of the year decrease of indicators in the fourth quarter. In the case of industry, all indicators show it has slowed its pace of decline, as in services, where the participation rate continued to moderate its descent. It also highlights the moderation of the fall in industrial prices in October, thanks in part to energy prices and to a lesser extent, prices of intermediate goods. Import prices, meanwhile, stressed its rate of decline to -13.8%, while exports eased its fall by nearly two points. Financial Performance On the financial development of the Spanish economy, the Bank of Spain notes that the latest data on the balance sheets of non-financial sectors, corresponding to October, show a “continuity” of the latest trends, because while General government funding continued to grow at” very high” rates the debt of households and companies will move into the new year as “practically nil”. As for international financial markets, the Bank of Spain has shown that their evolution over the last month has been marked by “instability” by the uncertainty generated by the problems of debt repayment in the Dubai fund, though the appearance of favourable macro-economic data and the return of some U.S. aid have helped to support markets. In another article in the Economic Bulletin, the Bank of Spain made an analysis on the impact of R & D in economic activity and concludes that this investment has a positive long term effect on GDP of the Spanish economy, of similar magnitude to that of other developed economies. In contrast, the short and medium term positive impact on GDP seems to be slower in Spain than in other developed countries, which would confirm the presence of “problems of technology transfer” from the research sector to goods producing sectors and final services. It indicates that investment in public R & D seems to generate a drag effect on private R & D, but also generates a certain “expulsion effect” on the latter, due to “bottlenecks” in the research sector as a result of both the public and the private sector competing scarce resources-qualified capital. Thus, bank said that public intervention in the field of innovation can have a positive effect on economies with low levels of expenditure on R & D but, once it exceeds a certain threshold, additional increases in public spending in this matter only substitute for private spending. Story from Barcelona Reporter

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Bank of Spain: Improved Q4 Indicators for Economy

Spanish savings banks have begun selling off the large property portfolios they acquired as collateral from loan defaults, in an effort to improve solvency ratios, a move that risks further falls in property values that could impair the value of their asset books. In Spain, the global financial crisis that erupted in 2007 ended a real-estate and construction-based asset boom, plunging the country into a recession that has yet to end, even as many other European economies have returned to growth. As the unemployment rate has soared to more than 19%, residential-property buyers have defaulted on loans in massive numbers, as have property developers, overleveraged in a moribund market. As lenders have assumed the collateral on defaulted loans, local financial institutions—particularly unlisted savings banks—have collected properties valued at about €8.5 billion ($12.2 billion) over the past 12 months. So far the banks have held on to the vast majority of these properties, hoping an eventual economic recovery will allow the disposal of these assets at acceptable prices—a strategy they successfully adopted during a recession in the early 1990s. Accumulating properties also stopped a sharp drop in prices, avoiding the painful write-downs banks are required to book when the value of their assets falls. Until now the strategy has worked. Spanish property prices have been unusually resilient. Average prices have dropped by a modest 9% over the past 12 months. In the last five years of the housing bubble, average prices jumped 71%, according to Housing Ministry data. But now banks are facing new demands for liquidity that will force them to sell more property. They are drawing up sales strategies, creating real-estate management divisions and offering discounts in an effort to lure buyers. Solvency pressures on the banks come from several directions. First, the downturn has meant smaller inflows of cash held in deposits and bank accounts. Second, the Bank of Spain recently required local financial institutions to set aside more money to cushion potential losses from a drop in the value of repossessed properties. Banks must now set aside 20%–up from 10%–of the value of a property held on their books for more than one year. Finally, a big restructuring of the savings-bank sector is in the cards, for which banks need funds to clean up their loan books. Such incentives to liquidate property portfolios have banks looking to sell. “Three of the five real-estate companies that have sold the most properties this year are controlled by financial institutions,” says Manuel Romera, head of the Financial Sector Program at Spain’s IE Business School. Bank disclosure on property sales is limited. Unlisted savings bank Caja Madrid, Spain’s fourth-largest financial institution by assets, said it has sold 600 properties from January to September for about €100 million and estimates it has €1 billion in real-estate assets. The bank launched a Web site, set up a call center and will have desks at some branches to sell properties. Smaller rival Caixa Catalunya said it unloaded 800 properties from a total of 3,600 properties it reported owning as of May, while Banco Santander SA, the country’s largest bank by assets, said it unloaded some 1,000 properties from January to October. In April it reported owning some €4 billion in real-estate assets. However, banks “are realizing that unwinding real-estate assets is much more complicated than expected,” says José Luis Suárez, financial management professor at IESE Business School. “The short-term outlook isn’t positive.” In the absence of an active real-estate market, the process of price discovery could show market values of many properties are far lower than their book values. Analysts say that some banks and saving banks, particularly small ones, could suffer losses in the first half of 2010. They say banks with high levels of expenditure to income may be in trouble. “Growth and employment prospects for Spain are markedly more pessimistic and, together with falling support from immigration and foreign demand, it is difficult to argue in favor of any near-term housing market recovery, especially in the face of a massive supply overhang,” HSBC said. The research department of Spanish bank BBVA estimated in June that Spanish housing prices would fall by 10% in 2009 and by 12% in 2010. It envisioned a total 30% peak-to-trough drop. A new review in December didn’t change that forecast. According to the Bank of Spain, 70% of a total of €30 billion in real-estate assets owned by financial institutions is now in the hands of savings banks, many of which are comparatively small and regionally focused. Were BBVA’s estimate of the fall in house prices to prove accurate, the value of the €30 billion of real-estate assets held by banks could fall some €6.6 billion in the next two years. To avoid these losses from becoming a bigger problem–perhaps necessitating state intervention—the Bank of Spain is encouraging banks to look for merger partners. The central bank believes that fewer, bigger banks would improve efficiency and strengthen solvency. More than a dozen of the country’s 45 savings banks are now in tie-up talks. So far, only one Spanish financial institution, savings bank Caja Castilla-La Mancha, has needed a state bailout. But two other banks—the Andalusian savings bank CajaSur and the Catalonian savings bank Caixa Catalunya—have already run into trouble after seeing default levels increase far above the industry average because of their high exposure to real-estate development. As a result, both of the banks are now discussing mergers. Caixa Catalunya is talking with Caixa Tarragona and Caixa Manresa, which, if a deal goes ahead, would create the fourth-largest savings bank in Spain. CajaSur is talking with Unicaja and Caja Jaén, which would create the sixth-biggest savings bank in Spain by asset volume. Story from Wall Street Journal

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Spanish Banks Saddled With Property Debt

One of the conundrums facing the Spanish property market is when Spanish property will again become financially appealing to British buyers - given the collapse of Sterling against the Euro which has affected both potential buyers and existing owners of Spanish property. Obviously, the current strength of the Euro against Sterling has had dramatic consequences for anyone living in Spain and relying upon an income paid in Sterling. The difference between an exchange rate at 1.40 Euros to the £ and (say) 1.10 Euros to the £ is huge. In effect, the purchasing power of a UK pension in Spain has dropped by some 30% over the past couple of years. This has unexpectedly ruined the financial planning of many Britons and made, for some people, life in Spain too expensive to sustain. Indeed, many ex-patriot Britons have had to place their properties in Spain for sale so that they can return to the UK. The danger of this is that many estates in Spain with a high density of British property owners have, as a direct consequence, a disproportionate number of properties for sale. Of course, the more properties in Spain there are for sale in a given area the harder it is to sell (the laws of supply and demand) with any seller having to rely upon a severe price reduction to differenciate his property from his competitors. This is never more true than when an estate comprises more or less identical properties - which is often the case on ‘new’ urbanisations. To make matters worse, some estates in Spain are primarily ‘British’ and therefore unlikely to appeal greatly to other nationalities. This means that any likely buyers of Spanish properties on ‘British’ estates will largely remain fellow Britons – themselves hampered by the weakened purchasing power of Sterling. Of course, many Britons bought their properties when Sterling was at 1.40 (or more) to the Euro. This means, very crudely, that they can drop the sale price of their Spanish property by 30% - and still get their money back (at current exchange rates). Property in Spain has fallen by (at least) 30% since the end of the boom in 2007. So, if you, as a Briton, reduce your Spanish property price by 30% (from its 2007 level) then your property in Spain is still not cheap - to a British buyer! In fact, the 30% drop in an ‘in-coming’ Briton’s purchasing power means that your Spanish property price has, in effect, not fallen at all. So, ironically, any UK buyer is going to be looking for a further price discount before he even begins to think he is getting anything like a real bargain. In fact, ironically, Britons in Spain are not helping the vortex of falling Spanish property prices. At the moment, many are able to drop their prices by 30% with impunity – and then to drop them by a further 10% - 20% if they are prepared to take a (reasonably acceptable!) loss to extricate themselves from Spain. This is more than most Spanish or Euro sellers are prepared to countenance but acts to further destabalise the Spanish property market. Certainly, it is no secret that the stabalisation of a property market is utterly dependent upon ‘distress’ sales being rare. Until that is the case, any property market will continue to be volatile with the emphasis being on continued falling prices rather than any marked ‘levelling off’. So, are prices stabalising on British owned property in Spain? Sadly, I rather doubt it – although this could change should Sterling suddenly find sustained strength against the Euro. This would put money back into the pockets of those Britons in Spain drawing their incomes in Sterling and thereby make them less desperate to sell. It would also, as a side effect, force prices up as the Euro weakened and reduced the ability of British sellers to drop their sale prices ‘artifically’ on the basis of having bought when Sterling was strong. In the meantime, can Spanish property offer value for money to in-coming Britons carrying Sterling worth some 30% less than a couple of years ago? The answer is a cautious yes. The unfortunate number of true distress sales (particularly on ‘British’ estates in Spain) provide some real opportunities to buy Spanish properties at bargain prices unthinkable a few years ago – even given Sterling’s depreciation against the Euro. From Nick Snelling’s latest book: How to Move Safely to Spain

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Spanish Property: Wavering Appeal to British Buyers

House prices in Spain haven’t yet fallen far enough, says Spaniard Luis Garicano, Professor of Economics and Strategy at the London School of Economics (LSE), in an interview with the daily paper Público. As a result, it’s too early to say the property bubble is over. Here are a selection of quotes from the interview, where it referred to the property market situation in Spain. Have Spanish house prices fallen enough? No. The fall in Spanish property prices has been very small compared with other places that had similar run up in prices, like the US where prices have fallen by more than 50%. There is a massive over-supply, perhaps of 1.5 million homes, more than in any other country on earth. Is it possible to change the (Spanish) mentality towards buying homes (over renting) Of course. Renting was common in Spain until the 70s. It disappeared when rents were frozen at a time of inflation. If rents are made more efficient, if VPO (social housing for sale) is eliminated and replaced with ordinary housing subsidies, and if mortgage tax relief is eliminated, the market will change radically. What must happen to put an end to the Spanish economy’s dependence on real estate Two things. Firstly, the labour market model must be changed, as it is too dependent on rotation and temporary contracts. Secondly, our education system needs to change. 41% of young Spaniards between the ages of 25 and 34 never finished secondary education. That’s the highest level in Europe. Garicano also answered a question on the banking crisis and bailout, which I thought was rather a neat summary of the situation. Has moral hazard in the financial system increased? Four years ago, there was still a little bit of discipline in the system, because if you went too far you might go bankrupt. Now the situation is even worse. All the banks know that they are taking risks, and if assets go up, they keep them, and if they go down, the state gets them. It’s Capitalism for the poor and Socialism for the rich. So the banks know that they will always be bailed out? Exactly. Banks are negotiating with state guarantees. It’s like going to the casino knowing you can afford to lose as much as you want. Story from Mark Stucklin Find out about Key-ready Spainish properties with 40% discounts from peak 2007 prices.

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Spanish Property Prices: Further to Fall

Spain is among the countries targeted as EU finance ministers adopted new recommendations for 14 countries given firm deadlines to bring bloated public deficits back under tight control. Budget overspending and consequent national debt, already a severe problem for many countries before the financial crisis, are now turning into a critical dilemma for some nations, notably Greece, as they recover from the slump with deficits three times the required limit. Austria, Belgium, the Czech Republic, Germany, Italy, the Netherlands, Portugal, Slovakia and Slovenia all saw excessive deficit procedures formally opened at talks in Brussels otherwise focused on agreeing new pan-European financial oversight arrangements. Revised recommendations for Britain, France, Ireland and Spain were also agreed, while Greece was again reprimanded for failing to take adequate “corrective measures” to-date. Ireland, France and Spain have been subject to the excessive deficit procedure since April 2009 and Britain since July 2008. Belgium and Italy were given until 2012 to reduce their deficits below the three percent of gross domestic product laid down by EU rules. Austria, the Czech Republic, France, Germany, the Netherlands, Portugal, Slovakia, Slovenia and Spain were each given until 2013. Ireland has until 2014 and Britain until the 2014-15 financial year, the council said, adopting adjusted European Commission recommendations. The deficit action is seen as the cornerstone of broader exit strategies from swollen economic pump-priming by governments over the past two years in efforts that staved off a prolonged depression. As Europe emerged from recession, the ministers agreed on the timetable after figures issued last month showing that eurozone public deficits were set to triple this year to 6.4 percent of GDP and almost 7.0 percent in 2010. Only seven EU members — Bulgaria, Cyprus, Denmark, Estonia, Finland, Luxembourg and Sweden — have respected the three percent limit. Greece’s public deficit is expected to hit 12.7 percent of output this year, with Athens having outlined plans to reduce it to 9.1 percent next year. Member states have formally agreed to start beating a retreat on unsustainable housekeeping by 2011 at the latest, ongoing recovery permitting. Story from Expatica

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EU Sets Deadlines for Deficit Countries

Economic figures released Thursday provided little evidence that the 16 countries that share the euro are enjoying a strong recovery from recession. Eurostat, the EU’s statistics office, confirmed that the eurozone’s economy grew by 0.4 percent in the July-September quarter from the previous three-month period - unrevised from its previous estimate - and that retail sales were flat in October from the previous month. According to Eurostat, Greece and Spain remained the only two eurozone countries in recession. Germany, the currency bloc’s biggest economy, posted quarterly growth of 0.7 percent. The third quarter rise was the first in six quarters and brought to an end Europe’s sharpest recession since World War II. Though the eurozone’s banks were not at the epicenter of the financial crisis that triggered the global economic downturn, the region suffered as demand for its high-value products fell off a cliff. The EU as a whole, which includes non-euro members such as Britain and Sweden, grew by 0.3 percent, just above the previous estimate of 0.2 percent, while retail sales rose 0.3 percent in October from the previous month. In addition to Greece and Spain, Estonia, Cyprus, Hungary, Romania and Britain continued to see output shrink during the quarter. The severity of the recession is evident in the annual comparisons - despite the modest third quarter growth, Eurostat said eurozone output was 4.1 percent lower than the year before while the EU’s GDP was down 4.3 percent. However, both were improvements on the 4.8 percent and 5.0 percent contractions recorded in the second quarter. Despite the modest third quarter improvement, growth is not expected to return to pre-crisis levels for a while yet, meaning the output lost during the recession will take years to be made up. Thursday’s data comes ahead of the latest policy statement from the European Central Bank. Analysts expect a number of significant decisions and announcements from the central bank for the 16 countries that share the euro - even though the benchmark rate will likely stay at the record low of 1 percent for months to come. In particular, they will be looking to see what President Jean-Claude Trichet says in his press conference about liquidity measures introduced to keep the banking system from collapse and to limit the scale of recession. Story from Forbes

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Eurostat: Spanish Economy Still Shrinking

The tie-up of the two Catalan institutions, Caixa Penedes and Caixa Laietana, will create the country’s ninth-largest savings banks by assets. Plus, Unicaja and Cajasur of Andalusia are the latest two banks to merge in the midst of the nation’s worst recession. Two Spanish savings banks, Caixa Penedes and Caixa Laietana, said Wednesday they had agreed to merge, creating the country’s ninth-largest savings bank by assets. The tie-up of the two Catalan institutions will create a savings bank with over EUR 32 billion in assets, over 900 offices and a staff of around 4,000, the two said in a statement. Last week, Bank of Spain governor Miguel Fernandez Ordonez said he would like to see a third of the country’s 45 savings banks quickly absorbed by stronger institutions. He suggested the radical reform in a bid to help the sector which is struggling in the midst of the nation’s worst recession in decades. “I think there are at least 15 institutions that should merge with others. I hope (by) next spring we have restructured all these institutions, that’s my idea. We now have many, many mergers that we are discussing,” he told the Financial Times newspaper. Spanish commercial banks got off relatively lightly from the subprime mortgage crisis in 2008, as the country’s strict rules meant they did not invest heavily in the high-risk loans that caused the economic chaos. But many, especially smaller unlisted saving banks usually controlled by regional politicians, were badly hit by the collapse of the country’s once-booming Spanish property market. Unlike in several other European nations, no bank in Spain has been formally nationalised as a result of the global credit crisis, but in March Madrid placed the regional Caja de Ahorros Castilla La Mancha under special administration. And in June, Spain announced a multi-billion-euro fund to help revive the financial sector by buying stakes in banks hit by the global crisis to get them lending again. Story from Expatica Two more regional Spanish savings banks, Unicaja and Cajasur, said they had agreed to merge as the pace of consolidation in the sector gathers pace due to a recession which has fuelled bad loans. The two banks, based in the southwestern region of Andalusia, reached the deal late on Monday, they said in a statement sent to Spanish stock market regulator CNMV. Unicaja and another savings bank based in Andalusia, Caja de Jaen, agreed in August to merge and by joining force the three banks will give rise to a powerful regional financial institution. Story from Expatica

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Two Bank Mergers in Spain - Many More to Come