Housing, Banks Weigh On Spain's Fragile Economy

Nov 4, 2011
Originally published on November 4, 2011 11:22 am

With Greece in flux over whether it'll remain in the eurozone, other weak economies like Spain are feeling the heat.

The worst could be yet to come in Spain — not because of public debt, but because its banks are still laden with unpaid real estate loans, putting both the banks and the housing market in jeopardy. Real estate prices in Madrid are still high, though salaries are frozen and unemployment soars. When Ireland's housing bubble burst, prices dropped more than 40 percent. But in Spain it's an 18 percent drop on average.

Spanish banks own lots of property, and they haven't yet written off the losses.

"They're not talking about it so as not to provoke fear," says Gayle Allard, an economist at Madrid's IE Business School. "Housing prices have hardly fallen. What that tells you is that the banks are just hanging onto those assets and not unloading them, because the minute they do, their balance sheets are really going to look bad. The value of housing will really collapse. It hasn't happened yet."

What's frightening, Allard says, is that Spain has not yet hit rock bottom in this crisis — not until the banks reckon their losses.

When EU leaders in Brussels look southward across Europe, they tend to cringe most at sovereign debt — countries like Greece, Portugal and Ireland that can no longer afford to service their loans. Spain, by contrast, has much lower government debt, Allard says.

"The problem with Spain is private debt, and that's what's weighing down on the banks — the part that might not get repaid," she says.

Alvaro Nadal, the economy secretary for Spain's Popular Party, which is forecast to win national elections on Nov. 20, says EU leaders are wrong to focus on banks' vulnerability to Greek debt. He wants broader help from Brussels to keep Spain's banks afloat.

"If it's a general capitalization, and each country can use it to solve their internal problems, domestic problems they've got in their balance sheets in banking, for example, real estate in the case of Spain, or sovereign debt in other countries, OK. But the exercise we are doing right now in Brussels is just thinking about sovereign debt," Nadal says. "And that's what has been mistaken."

This past week, Spain's central bank warned of "troubled exposure" to real estate. Many mortgages and loans to real estate developers are only now coming due. Defaults are on the rise. Already 7 percent of all bank loans in Spain go unpaid.

"Big banks, I think should be OK," Allard says. "It's the small ones, these savings banks, who have so many of their assets in mortgage loans, that they're going to be scrambling to try to keep them propped up."

Prime Minister José Luis Rodriguez Zapatero said his government will help small banks restructure, if needed. But the Spanish election is nearly two weeks away. Zapatero isn't running, and the opposition Popular Party has a double-digit lead in the polls. Spain's banks might be on the precipice, but any action to save them will likely have to wait until after the election.

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Transcript

STEVE INSKEEP, HOST:

We've been reporting on the confusion in Greece today. Greeks are trying to get their governmental act together in the face of pressure from other European nations to go along with a bailout deal. And there's concern about other countries, including Spain. The problem there is not too much public debt. Spain's crisis, if there is one, would come from its banks, because they still have a lot of unpaid real estate loans. From Madrid, Lauren Frayer reports.

LAUREN FRAYER, BYLINE: Scrolling through real estate ads in the Spanish capital can be sobering. Prices are still very high, even as salaries are frozen and unemployment soars. When Ireland's housing bubble burst, prices there dropped more than 40 percent. But here, it's 18 percent on average. To understand why, take a look at who actually owns the property. It's the banks. With an average of 300 foreclosures a day nationwide, Spanish banks own lots of property, and they haven't yet written off the losses.

GAYLE ALLARD: They're not talking about it just so as not to provoke fear.

FRAYER: Gayle Allard is an economist at Madrid's IE Business School.

ALLARD: Housing prices have hardly fallen. And what that tells you is that, you know, banks are just hanging onto those assets and not unloading them, because the minute they do, their balance sheets are really going to look bad. You know, the value of housing will really collapse, and it hasn't happened yet.

FRAYER: What's frightening, Allard says, is that Spain has not yet hit rock bottom in this crisis, not until the banks reckon their losses. When EU leaders in Brussels look southward across Europe, they tend to cringe most at sovereign debt, countries like Greece, Portugal and Ireland that can no longer afford to service their loans. Spain, by contrast, has much lower government debt, Allard says.

ALLARD: The problem with Spain is private debt, and that's what's weighing down on the banks and the part that might not get repaid.

FRAYER: Alvaro Nadal is the economy secretary for Spain's Popular Party, which is forecast to win national elections on November 20th. He says EU leaders are wrong to focus on banks' vulnerability to Greek debt. He wants broader help from Brussels to keep Spain's banks afloat.

ALVARO NADAL: If it's a general capitalization, and each country can use it to solve their internal problems, domestic problems they've got, for example, real estate in the case of Spain, sovereign debt in other countries, okay. But the exercise we are doing right now in Brussels is just thinking about sovereign debt. And that's what has been mistaken.

FRAYER: This past week, Spain's central bank warned of troubled exposure to real estate. Many mortgages and loans to real estate developers are only now coming due. Defaults are on the rise. Already, 7 percent of all bank loans in Spain go unpaid. Allard explains what that means for Spanish banks' survival.

ALLARD: Big banks, I think should be okay. It's the small ones, these savings banks, who have so many of their assets in mortgage loans, that they're going to be scrambling to try to keep them propped up.

FRAYER: Prime Minister Jose Luis Rodriguez Zapatero said his government will help small banks restructure, if needed. But the Spanish election is about two weeks away. Zapatero isn't running, and the opposition conservative party have a double-digit lead in the polls. Spain's banks might be on the precipice, but any action to save them will likely have to wait until after the election. For NPR News, I'm Lauren Frayer, in Madrid. Transcript provided by NPR, Copyright NPR.