Saturday, April 4, 2009

Spain Bails Out First Bank

On March 30th, Spain's central bank announced the bail out of Caja de Ahorros Castilla La Mancha (known as CCM), marking the first time a Spanish financial institution has been rescued since the current financial crisis began. The government will provide the regional bank with up to 9 billion euros to keep it afloat.

Although small on an individual basis, I suspect this will the first of many bailouts as the Spanish housing market undergoes a fierce correction. As noted in my January 23th post discussing the recent spike in euro-denominated credit spreads, the bubble in Spain's housing market far exceeded that experienced in the United States. At the peak in 2006, approximately 750,000 homes were built in Spain, nearly half the number built in the US, despite Spain having a population 1/7 ours.

As this Economist article discusses ("The "Mess in La Mancha"), the building boom in Spain cooincided with the growth in cajas, small, mutually owned banks controlled by depositors, employees, and politicians. The cajas grew their market share of loans from 10% to 50% and continued to lend aggressively in 2006 and 2007, even as Spain's larger banks pulled back. As such, up to 20% of the cajas' assets are in the form of construction loans to struggling property developers, with non-performing loans beginning to spike (see chart below).


If problems in Spain's housing market aren't enough, unemployment is now projected to eclipse 20% in 2010, placing further strain on the country's financial institutions. Just as the July 2008 bankruptcy of Martinsa-Fadensa, Spain’s largest property company, served as a canary in the coal mine for the ailing property sector, so should CCM be viewed as a harbinger for more pain for the nation's banks. As such, I remain short Spain and believe that the country's economic struggles have only begun.

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