When the global financial crisis erupted in 2008, the Bank of Spain was one of few regulators lauded for having had the forethought to enact measures aimed at protecting the banking industry. It had prevented Spanish banks and savings banks from handing out the junk loans that brought down several American lenders, and, uniquely, it created a €40-billion “anti-crisis” fund at a time when many shorter-sighted bankers, economists and analysts thought the credit boom, on the back of low interest rates and rising property prices, would continue indefinitely.
Four years later, Spain’s economy is now being held hostage by its banking industry as fears about the ability of banks and, in particular, savings banks to service their debts have made it difficult for the country to find buyers for bonds. Spain is not Greece or Ireland, whose debts and deficits led to bailouts by the EU and IMF last year, but it is nonetheless facing unprecedented challenges in keeping its banking industry and, by extension, the broader economy afloat.
Banks and savings banks hold €150 billion in problematic loans linked to real estate –equivalent to 15 percent of GDP– and the real estate boom that both created demand for those loans and encouraged lenders to grant them was recently identified as having been the largest property bubble in the world by the IMF. Spain’s debt rating has been repeatedly downgraded by international ratings institutions, most recently by Moody’s. Banks and savings banks –the most troubled lenders– are now facing new capitalisation and transparency requirements. And, last weekend, the EU agreed to allow its rescue fund to buy government bonds directly, a move aimed at ensuring Spain and other troubled euro-zone members such as Portugal and Greece can continue to tap debt markets.
What went wrong?
In fairness, the Bank of Spain did what it could. It foresaw the looming credit crisis as early as 2003 but, like other regulators and economists around the world, it failed to envision the scale of the problem. And, even though central bank officials, according to reports and minutes of meetings, were not blind to the risk of banks and savings banks tying their futures so closely to an overheated real estate and construction sector, they were politically powerless to stop it. Neither the previous Popular Party government nor the Socialist administration that came into power in 2004, let alone the bankers themselves, really wanted to put the brakes on a credit boom that looked like easy money. Although on paper the Bank of Spain is independent, in reality it found its hands tied by politicians and the powerful banking lobby. Even managing to enact the measures it did, and was subsequently applauded for, was an uphill struggle, central bank officials acknowledge. And while those measures may not have prevented Spain’s risk-laden banking industry from dragging down the broader economy, without them, the situation could have been much worse.
“If the central bank hadn’t taken those steps, we would probably look a lot more like Ireland today,” notes one economist.
The central bank did indeed shoot a warning shot across the bows of the Spanish Banks in 2003. In at least one of the Governors quarterly reports he ordered the banks to pull back on development lending and told them clearly it was unsustainable.
Shortly after a new government was elected and whilst we were told by Banks they had to heed the warning and reduce lending they then in fact went on to increase the level of loans given.
There shold be no sympathy for the Banks or indeed the Political parties who could have avioded the situation we are now in.
It was development funding that was real issue not lending to individuals.
To sort Spain the whole Political landscape needs to change and the Banks need to accept their losses sell the surplus real estate at whatever price they can, until this happens and the market fully bottoms out recovery is not possible.
I agree totally with Heather-the BofS deserves no sympathy-no point in setting tough conditions/regulation if the regulated brazenly flaunt them.
In fact,just now reading that NPLs are climbing ever higher-what supervision,eh???
I agree with Heather re the banks having to accept losses. Many are refusing to cut the prices of the stock of repossessed properties on their books for fear of recognising losses. For those that are taking a pragmatic approach cutting to realistic levels- some are going to 50% of their original developer prices- then they are selling.