And secondly the chart showing the average rate of interest charged by Spanish banks on new mortgages, which as we can see, has been rising steadily since December 2007.
The average interest rate charged by Spanish banks for new mortgages in January 2009 was 5.64%, meaning that the average cost of a new mortgage had gone up by 10.2% over January 2008 (when the rate was 5.1%), and by 1.1% when compared with December 2008. Meanwhile the Euribor reference rate looks set to close this month at all time record lows of 1.91%. In January - the last month for which we have data on mortgage lending - the Euribor rate was 2.27%.
The reasons lying behind this upward movement in Spanish mortgages are twofold. On the one hand the Spanish banks are having increasing difficulty raising finance due to their perceived risk level, and on the other they themselves have have been forced to raise the risk premium they charge to clients due to the rising levels of non performing mortgages they have on their books.
Basically what this means is that the ECB policy isn't working in Spain, and that despite the massive quantities of liquidity provided, the monetary conditions continue to tighten, and doubly so give that the real value of the rates charged (ie the inflation adjusted value) keeps rising automatically as inflation falls.
Mortgage lending in Spain more than halved in January while the number of homes started in the fourth quarter dropped an annualy 62 percent. The 51.7 percent year on year fall in mortgage lending for urban dwellings was the steepest in 12 straight months of decline.
House sales fell in January by 38.6 percent, figures published earlier this month showed, and Housing Ministry data showed the foundations of only 40,737 homes were laid in the fourth quarter - 62 percent fewer than in the fourth quarter of 2007, and 27 percent down on the preceding quarter. During 2008 as a whole, Spanish builders started 360,044 homes - a 41.5 percent fall on 2008. On the other hand 633,228 homes were completed last year, reflecting the optimist which prevailed in 2006/07 when the buildings were started at the height of the boom in 2006-07.
Spain has a supply overhang estimated at almost any number you like over 1 million unsold homes (the minimum estimate, and no one really knows), or more than three times the number of new households created each year in Spain.
The number of mortgages offered has crashed as banks restrict credit given forecasts non-performing loans will reach around 9 percent next year, while unemployment is now likely to rise above 4.5 million by years end, up from the current 3.5 million.
As I indicated in this post yesterday, we are moving from a situation where people the banks were afraid to lend, to one where people become increasingly afraid to borrow (since they don’t know when they will lose their jobs, or even their homes), with Spain's citizens becoming more and more reluctant to take on additional debt due to fears they could be caught in the next round of job losses.
As a result January mortgage lending falling to 6.47 billion euros, while the rate of new bank lending to households dropped to 3.9% year on year.
Spanish debt defaults leapt 197 percent in 2008, with construction and property firms accounting for 4 of every 10 failures. The number of firms and individuals that filed for administration rose to 2,902, the highest level on record, according to Spain's National Statistics Institute. Also bad loans at Spanish banks rose by 15.3 percent in January, the sharpest monthly increase since property developer Martinsa Fadesa filed for administration in July. Bad loans rose more than 9 billion euros to 68.18 billion in January compared with an average monthly rise in the last six months of around 5 billion euros.
The non-performing loans (NPL) ratio for all institutions was at 3.8 percent in January, up from 3.3 percent in December, with rates among savings banks the highest at 4.45 percent compared with 3.79 percent a month earlier. Commercial banks had an NPL ratio of 3.17 percent, up from 2.81 percent. In fact Spain's financial institutions have seen NPLs more than quadruple in the last 12 months from 16.23 billion euros in January 2008.
Spain's savings banks, responsible for about half the country's loans and the most exposed to the property market downturn, could see NPLs rise to 9 percent by 2010, according to the saving banks association.
What To Do With The Bad Banks?
As a result of all this an embarassing and very public row (unusual in Spain) has broken out over what to do with the broken banks.
The Spanish Economy Minister Pedro Solbes has said the government is prepared to recapitalise healthy banks but suggested that those with serious solvency problems should seek a merger rather than look for state aid.
"In cases where banks have acted correctly in relation to solvency and the health of their accounts...logically they could receive support," Solbes said in a speech to an economic conference in Madrid. "Banks that are unable to remain solvent and clean up their accounts should cease to be players in the financial system so they don't generate distortions in the public sector."
What Solbes has in mind is that the troubled banks should turn to Spain's privately-funded Deposit Guarantee Fund (FGD) should they need capital injections to make tie-ups viable. However, the insurance fund holds only 7.2 billion euros in bank contributions, and since this is orders of magnitude less than the size of the problem it is obvious the government will end up having to putting money into the recapitalisation process, and especially into the Savings Bank sector, since the Spanish press has been reporting that 20 of Spain's 45 savings banks are now considering mergers. And it is obviously only a matter of time before one of the mid-sized Spanish banks like Popular, Sabadell or Banesto joins the consolidation process.
Clearly many of those most directly involved in the banking industry are laothe to accept the Solbes formula, since wuite simply they cannot afford it. And this was made pretty clear by Francisco Gonzalez, chairman of Spain's second largest bank BBVA, when he pointed out last week that nationalisation of the bad banks was the only realistic way forward.
"When a bank shows signs of extreme weakness the authorities should take control of it, which implies removing the directors and reducing or eliminating share capital in the institution," Gonzalez said at a conference in Madrid.Governments should then appoint a new team to separate toxic assets from healthy ones and quarantine them in publicly controlled funds, the chairman said, advocating a level of state intervention not yet seen in Spain. "Then the bank would be privatised again through a transparent sale to private companies," he said, without making specific reference to Spanish banks.
Two Spanish regional savings banks have already reached a preliminary merger deal - Unicaja, based in Spain's southern Andalucia region, and the smaller Caja Castilla La Mancha (CCM), located in the central-southern province of the same name - following talks which were carefully brokered by the Bank of Spain. Clearly this merger willl need to be followed by a capital injection from Spain's Deposit Guarantee Fund to help them clean up the "troubled assets" which will naturally be found in the combined accounts of the new bank which emerges. Many other such regional caja "weddings" are obviously soon to follow. But the big question is, where will all the financing come from? It is pretty clear that the problem which is building up is bigger than Spain can handle alone, and finance (not loans) from the European Union will be needed, with centrally backed EU Bonds being the most likely mechanism with which to fund the injection.
Update Sunday: No Caja Castilla-La Mancha/Unicaja Merger
Finanzas.com had this piece which I am publishing direct in Spanish while I sort out what is happening a bit more. This is obviously the first, but it certainly won't be the last.
There is going to be no merger between these two banks, since the Bank of Spain has decided to "intervene" in the running of Caja Castilla-La Mancha, due to its "delicate financial situation". Below is a link from
No habrá fusión con Unicaja. El Banco de España va a intervenir Caja Castilla-La Mancha (CCM) debido a su delicada situación fiancniera y su desfase patrimonial, estimado en unos 3.000 millones de euros.
La decisión está tomada en fin de semana previsiblemente para evitar la posible fuga de depósitos. La caja manchega se encuentra actualmente en plenas negociaciones con la malagueña Unicaja para una eventual fusión, una operación avalada por el Gobierno y tutelada por el Banco de España y que el PP ha denunciado por "oscurantista".
Los 'populares' incluso han solicitado en las Cortes de Castilla-La Mancha una comisión de investigación que determine las responsabilidades de los "gestores políticos de la caja" en unos posibles créditos dudosos que han supuesto que CCM tenga ahora un abultado agujero, que algunas fuentes cifran en 3.000 millones de euros.
La entidad que preside Juan Pedro Hernández Moltó obtuvo en 2008 unos beneficios individuales de 92 millones de euros y 30,2 millones de euros de beneficios consolidados.
Fuentes próximas al Consejo de Administración de CCM han indicado hoy a Efe que la caja manchega prevé adelantar al 31 de diciembre de 2008 las dotaciones previstas para el 2009 e incurrir incluso en resultados negativos, con la finalidad de fortalecer su estructura patrimonial, en la próxima reunión del Consejo, que tendrá lugar este martes.
8 comments:
Edward I am glad you have hit on this subject. Out of everyone I know who's mortgage has been anually renewed up unto as recently as yesterday has had an increase,most people find this unbelievable even unacceptable When considering current Euribor rates. What is the government doing? I have visions of Nero fiddling while Rome burnt?
Hello there Mavrik,
Well I'm surprised to hear this part, since in theory this is what they are charging on new mortgages, not on existing ones, which I thought had a fixed premium over one year Euribor (depending on the conditions you got).
The rate on new mortgages is important, of course, since in the longer term it influences the price for which properties can be sold. In the short term, of course, this is being driven by other factors.
"What is the government doing?"
Well there isn't that much the Spanish government can do about this. Spain is a price taker and not a price setter due to the external deficit.
And to change the situation you need to clean out all the toxic debt from the banking system. But since the quantity is very large, the Spanish government alone cannot fund this. Which is why we have to wait for them to come out of denial, eat humble pie, and go to Brussels with the begging bowl.
And the sooner they do this the better, since the situation simply gets worse by the day, as one more non performing loan piles up after another.
At this point there is no solution for Spain that is not a European one. It's as simple as that.
In 1930, John Maynard Keynes wrote: "The world has been slow to realise that we are living this year in the shadow of one of the greatest economic catastrophes of modern history." Today, as then, we are in the shadow of catastrophe. Today, as then, our thinking is slow. We need to come to grips with the crisis itself.
Two ingrained habits are leading to failure. The first is to assume that eventually economies will return to normal on their own. In London in January, US Federal Reserve chairman Bernanke said: "The global economy will recover." He did not say how he knows. The fact that for months the news has been consistently worse than expected shows that the forecasts are wrong. Their basic failure is that they do not take account of the massive pay-down of household debt, everywhere under way, as a result of the collapse of the banks.
The second bad habit is to believe that recovery runs through the banks rather than around them. This idea holds that credit is "blocked"; it must be made "to flow." The metaphor is fallacious. Credit cannot flow when there are no creditworthy borrowers, no profitable projects.
Hi,
"Credit cannot flow when there are no creditworthy borrowers, no profitable projects."
Absolutely. I couldn't agree more. And defining "catastrophe" as Keynes defined it, I also think we are facing "catastrophe" especially in the heavily indebted countries and in those they owe money to, and who live by exporting to them.
"Their basic failure is that they do not take account of the massive pay-down of household debt, everywhere under way, as a result of the collapse of the banks."
Perhaps I would just modify this slightly to say "their basic failure is that they do not take account of the massive pay-down of household and corporate debt which is going on as a result of the collapse in house prices and corporate profitability and which is leading to the continuing and ongoing collapse of the banks".
I'm not sure it is "everywhere underway" since I'm not sure the balance sheets were leveraged upwards everywhere in the same fashion. But as I suggest, the big surplus countries just get hit on the other side of the balance sheet, since they were doing the lending.
Some people, however, insist on thinking things will "start picking up in the second half of this year". Ha, ha, bloody well, ha.
Key points to solution:
1. Make economic forecasts realistic
2. Audit banks more honestly
3. Introduce effective financial regulation
4. Keep people in their home
5. Increase public retirement benefits
"Some of these issues are long term but the time to start work on them is now.
We are not in a temporary economic lull, an ordinary recession, from which we will emerge to return to business-as-usual. We are at the beginning of a long, profound, painful and irreversible process of change. We need to start thinking and acting accordingly."
Hi again,
Basically 1 to 3 are fine, but we need to remember this will make credit tighter, so the current contraction will accelerate.
GDP is moving to a much lower level.
Given this, 4 is going to be very difficult, and 5 is going to be impossible, we will move in the opposite direction, since Spain is heading for a huge crisis in public finance as the banks are cleaned up. Basically part of the solution is raining the effective retirement age (ie the average age at which people retire) and then the legal age up towards 70.
What is now going to be unsustainable is the model of attracting lots of migrants to work in construction and cheap jobs to pay Spanish pensions. The extraordinarily large number of construction jobs aren't going to exist, and the Spanish themselves are going to have to work in the cheap jobs. Either that or rot over at the INEM office.
Solutions are hard to come by at this point, but basically we need to focus on very concrete measures to get the real economy moving again whilst putting the banking system on a sounder footing in the longer run.
And here is the Eurozone we need to be focused on how to run a single size interest rate policy in the future WITHOUT producing bubbles in some countries. I hear no one talking about this at the moment.
Edward
I am confused. The president of the BBVA was in New York 2 weeks ago boasting that no Spanish bank had reported a loss in 2008. He went on to say that the Spanish banks should be used as a model when considering international banking regulation. My question is he in denial or are most banks in good health? I am not sure whether you saw this today.
http://www.ft.com/cms/s/0/acc789f0-1d1e-11de-a527-00144feabdc0.html
Hi Mavrik,
"My question is he in denial or are most banks in good health?"
Neither, he is simply doing his job, and saying what he has to say.
Basically, and to be absolutely explicit, either there is a massive (500 billion euros plus) injection from the EU and a very rapid reduction in prices and salaries or at some point (maximum time horizon 2 years) this whole thing is going to crash. And crsashing would mean going back to the pesseta, and the end of the Eurozone, so I can't understand why they are doing nothing.
Read the history books afterwards, and you will probably get to see the answer to your question.
On deflation, I will comment on this in a separate post, as I am working on something else at the moment (Romania's crash landing).
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