As the Spanish prime minister reveals plans for an overhaul of the country’s network of debt-soaked savings banks, he will be hoping to reassure anxious investors that Spain is not heading for an Irish-style banking meltdown.
Since the financial crisis began, Spanish officials and bankers have boasted of the relative strength of their banking system compared with those of the UK, the US and Germany. But the parallels between the troubles that have afflicted Spain’s regional savings banks – or cajas – and those that brought down Ireland’s banks are hard to overlook.
The problems stem from an aggressive expansion into commercial property and construction when the market was booming – and the severe losses triggered when those loans went bad.
Like the Irish banks, many cajas lent heavily to property developers, builders and homebuyers in the pre-crash years. Some of the most aggressive cajas doubled or even tripled their balance sheets during the boom years.
Since then, property prices have collapsed, debtors have fallen into bankruptcy, and bad loans have shot up, leaving many cajas in dire need of fresh capital.
“The system is sitting on probably 1.5m homes that need to be sold – that’s the glut,” says David Stix, a Madrid-based stockbroker and property expert. “Some of these banks have been forced to repossess these homes and have them on the balance sheet.”
According to the Bank of Spain, the “potential troubled exposure” to construction and real estate amounted to €180.8bn ($241bn) in mid-2010, with banks prepared for losses on only a third of that sum.
But the cajas’ woes are seen as less of a threat to Spain than the Irish banks’ troubles were to Ireland, largely due to the comparative size of the economies.
Analysts point out that the amount needed to bail out the cajas, which could be up to €90bn in a stressed scenario, would represent less than 10 per cent of GDP, while that needed in Ireland was about 30 per cent of GDP.