Spain escapes US sub-prime mess but faces its own crisis

Source : Business Times - 25 Dec 2008

Defaults for real estate, construction firms make up half of corporate credit

Spain escaped exposure to US sub-prime assets but risks its own property debt crisis in 2009 as defaults soar among real estate and construction firms that hold half of all Spanish corporate credit.

Over 1,000 Spanish property and building firms will have filed for bankruptcy protection in 2008 and more than 1,300 could follow suit next year as they struggle to repay over 470 billion euros (S$950.14 billion) in debt, according to PricewaterhouseCoopers.

The collapse of Spain’s decade-long housing boom will send non-performing loans to 9 per cent by 2010, from 3.5 per cent at present, threatening the solvency of savings banks that hold over half of all property debt, according to Credit Suisse.

Prime Minister Jose Luis Rodriguez Zapatero is ready to launch Spain’s first bank bailouts to avoid capital problems and the Bank of Spain expects a wave of forced mergers among small regional savings banks or cajas.

‘It’s the main risk to the whole banking sector,’ said Antonio Ramirez, a banking analyst at London broker Keefe, Bruyette & Woods. ‘I think the peak on defaults is quite close - probably mid-2009 - not because things are getting better, but because things are getting bad so quickly.’

Starved of easy foreign financing, Spain’s housing sector has collapsed under its own weight of over production.

Up to 1.5 million unsold new homes stand empty in Spain, equivalent to five years of sales at current depressed rates.

Demand is unlikely to recover until house prices hit bottom, and Standard and Poor’s says that may not happen before 2010, with a 30 per cent fall from a 2007 peak.

Spain is more dependent on housing than any European Union economy, bar Ireland. That has made real estate the Achilles’ heal of a banking sector which stayed out of US sub-prime debt due to Bank of Spain regulations and strong domestic business.

‘The Spanish central bank didn’t allow our banks to take American crap because they had their own crap . . . they were extremely exposed to the Spanish housing market,’ said economist Luis Garicano of the London School of Economics. ‘This famous 315 billion euros in developer loans and 160 billion in builder loans, that’s not going to be paid.’

This year alone, Spanish banks have been dumped with 15 billion euros of bad loans from builders, paid firms five billion euros for assets to stave off bankruptcies, and another five billion in debt-for-equity deals, Spain’s El Mundo newspaper reports.

Bad loans at larger, publicly traded banks such as Santander and BBVA, should remain at manageable levels around 4 per cent, according to Credit Suisse.

Some regional savings banks, that have higher property exposure, could see rates of 12 or 13 per cent in two years and face capital shortages, the investment bank estimates.

The biggest real estate victims so far are Martinsa Fadesa, which suffered Spain’s biggest ever corporate default with debts of 5.4 billion euros, and Habitat, 20 per cent owned by Heathrow owner Ferrovial, with 2.3 billion euros of debt.

The failure of giants such as Martinsa is the most visible sign of stress felt by an industry in which 95 per cent of home building is by small, unlisted firms.

Building sites that long fringed Spanish towns and villages are disappearing as firms finish off projects started before the credit crisis, then shut down.

The government has offered subsidised housing contracts and eight billion euros in public works spending, but the aid may only aggravate existing oversupply and construction dependency.

‘Time is the only thing that’s going to solve this one with the size of the stock, whether that’s two, three or five years,’ said Roger Cooke at real estate consultants Cushman & Wakefield.