Banking Problems in Spain About to Take a Negative Turn

Unlike Greece, Portugal and Italy, Spain experienced a housing bubble. House prices in Spain are about 22% off their 2007 peak and land prices have fallen 30%. The Bank of Spain expects further declines next year and its base case is for an eventual 50% decline in prices.

 

Non performing loans are at the highest since the advent of monetary union. As of June non performing loans stood at 17.8% up from 15.3% at the end of March. But there is great skepticism over these official figures. For example, the Bank of Spain took over (and operates) Caja del Mediterraneo (CAM) that has a delinquency rate greater than 40%. The BoS wants to auction it off, but there does not seem to be any interested parties.

 

If land and house prices continue to fall, the troubled loan category can only rise. The government, through the FROB has injected 11 bln euro into the banking system before Sept and have injected another 15 bln this month. More will likely be needed.

 

Thrown in poor growth prospects and continued credit downgrades and concern is likely to bubble up again.

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