Monday, March 30, 2009

Haciendo Caja

The Spanish government has had to step in directly for the first time to prop up one of the country's regional savings banks; the Caja Castilla - La Mancha. The government claims that it is just guaranteeing the solvency of the bank whilst it overcomes its "liquidity" problems, but it is now being run by nominees from the Banco de Espana. The irony of this has been noted by much of the press as the president of the bank was at one time a PSOE member of parliament who is most remembered for his interrogation of a former governor of the Banco de España. What goes around comes around. The caja had become severely overstretched for reasons that threaten other cajas around the country, the collapse of the construction boom. It seems that they had also invested heavily in the airport which will no longer be called Madrid Sur, but which has opened for business just at the beginning of the recession.

The government still insists that there are no fundamental problems with the Spanish banking system. Whilst that does seem to be largely the case in terms of the worthless sub-prime type investments that have caused problems in other countries, Spain has its own problems because of the dependency on the property market. On the one hand construction companies are no longer able to pay their considerable debts because they are saddled with huge numbers of unsold homes. The banks are in many cases receiving unsold properties instead of money repayments and are becoming the unwilling owners of substantial property portfolios. At the same time the relentless rise in unemployment is causing many of those who bought property in the boom years to default on their loans. The government has been trying to encourage the cajas to merge with each other, and it was the failure of such an attempt that led to the intervention in this case.

Talking of toxic assets with limited value, the government has also moved to freeze the attempt by Esperanza Aguirre to turn Caja Madrid into another branch of her ever expanding web of patronage. The national government has referred to the Constitutional Court the new law which Aguirre created to give her administration control of the bank at the expense of Madrid's ayuntamiento, amongst others. Given that Partido Popular leader Mariano Rajoy was either unwilling or unable to put an end to the prolonged and silly struggle between Aguirre and Madrid mayor Alberto Ruiz Gallardón, which is being fought out with Caja Madrid as the battleground, it's been left to others to do the job. The appeal means that the law can effectively be suspended for a crucial few months which might deny Espe her prize. As if the cajas didn't already have enough problems.


Rab said...

According to most observers, Spain has experienced the biggest property bubble in the EU, particularly if we measure house prices relative to earnings, and number of houses built per population.

The Government and the banks are adamant that everything is alright and under control.

Does anyone believe that Spanish banks are somehow insulated from the biggest property bubble in the western world?

But the banks not only have to cope with asset deflation (the loan collateral is worth less than the loan amount), but they are also coping with one of the highest unemployment rates in the EU (unemployed people cannot pay mortgages back), amidst a contracting economy (unemployed people cannot get jobs, companies cut back spending, suppliers go out of business, etc).

It is kind of a perfect storm.

As far as I know, it would be the first time in history that financial institutions are not impacted by the deflating of an asset bubble in their home market. Truly unbelievable.

Watchlist: CAM, Unicaja, Caixa Tarragona, Bancaja, Caja Murcia,Banco de Valencia, Caja Madrid.

I'd expect a few mergers, this year and the next...

Graeme said...

Where there aren't mergers there will be the richer banks hoping that public money will be used to clean up the ones in trouble so that they can then be snapped up at a bargain price by their bigger brothers.