The
Secrets of the Spanish Banking System That 99% of Analysts Fail to Grasp
April 29, 2012 By gpc1981 http://gainspainscapital.com
http://spainbanksystemsecrets.htm
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Indeed, to fully understand just why
The headline economic data points for
Unemployment for Spanish youth is 50%+: on
par with that of Greece
On the surface,
The answer to these questions lies within the dirty details of
For starters, the Spanish economic boom was a housing bubble fueled
by
Moreover, Spain’s wasn’t just any
old housing bubble; it was a mountain of a property bubble (blue line below)
that made the US’s (gray line below) look like a small hill in comparison.
In the
Spanish students weren’t the only ones going into real estate.
Between 2000 and 2008, the Spanish population grew from 40 million to 45
million (a whopping 12%) as immigrants flocked to the country to get in on the
boom. In fact, from 1999 to 2007, the
Spanish economy accounted for more than ONE THIRD of all employment growth in
the EU.
This is
This, in of itself, set
Spanish banks just drew €227 billion from
the ECB in March: up almost 50% from its February borrowings
Spanish banks account for 29% of total
borrowings from the ECB
Yields on Spanish ten years are approaching
7%: the tipping point at which
As bad as these numbers are, they greatly underestimate just how ugly
The caja system dates back to the 19th
century. Cajas at that time were meant to be almost
akin to village or rural financial centers. As a result of this, the Spanish
country is virtually saturated with them: there is approximately one caja branch for every 1,900 people in
Now comes the bad part…
Until recently, the caja banking system
was virtually unregulated.
Yes, you read that correctly, until about 2010-2011 there were next no
regulations for these banks (which account for 50% of all Spanish deposits).
They didn’t have to reveal their loan to value ratios, the quality of
collateral they took for making loans… or anything for that matter.
As one would expect, during the Spanish property boom, the cajas went nuts lending to property developers. They also
found a second rapidly growing group of borrowers in the form of Spanish young
adults who took advantage of new low interest rates to start buying property
(prior to the housing boom, traditionally Spanish young adults lived with their
parents until marriage).
In simple terms, from 2000 to 2007, the cajas
were essentially an unregulated banking system that leant out money to anyone
who wanted to build or buy property in
Things only got worse after the Spanish property bubble peaked in
2007. At a time when the larger Spanish banks such as Santander and BBVA read
the writing on the wall and began slowing the pace of their mortgage lending,
the cajas went “all in” on the housing market,
offering loans to pretty much anyone with a pulse.
To give you an idea of how out of control things got in
The cajas went so crazy lending money
post-2007 that by 2009 they owned 56%
of all Spanish mortgages. Put another way, over HALF of the
Spanish housing bubble was funded by an unregulated banking system that was
lending to anyone with a pulse who could sign a contract.
Indeed, these banks became so garbage laden that a full 20% of their
assets were comprised of loan payments
being made by property developers. Mind, you, I’m not referring to the loans themselves (the mortgages); I’m referring
to loan payments: the money
developers were sending in to the banks.
To try and put this into perspective, imagine if Bank of
This is the REAL problem with
Indeed, to give you an idea of how bad things are with the cajas, consider that in February 2011 the Spanish
Government implemented legislation demanding all Spanish banks have equity
equal to 8% of their “risk-weighted assets.” Those banks that failed to meet
this requirement had to either merge with larger banks or face partial nationalization.
The deadline for meeting this capital request was September 2011. Between February 2011 and September 2011, the number
of cajas has in
Put another way, over 60% of cajas could not
meet the capital requirements of having equity equal to just 8% of their
risk-weighted assets. As a result, 28 toxic caja
balance sheets have been merged with other (likely equally troubled) banks or
have been shifted onto the public’s balance sheet via partial nationalization.
On that note, I fully believe the EU in its current form is in its
final chapters. Whether it’s through
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Best Regards,Graham
Summers,Chief Market Strategist,