Hot spots: Spain.(international)(impact of financial crises on credit management)

For a long time, while the international financial crisis unfolded, Spanish banks seemed to be better protected against repercussions than most of their counterparts abroad. This was because in 2000 the country's Central Bank had introduced a system of "dynamic provisioning" that forced financial institutions in good times to build up reserves against future hypothetical losses. Thanks to this regulatory arrangement, banks began 2008 with more than 200% coverage of non-performing loans. The arrangement, which acts counter-cyclically in a way, was discussed by policy-makers throughout Europe as a possible model to emulate.

None of the major institutions have yet had to be bailed out, but problems have been mounting, nonetheless, because the banks and cajas (the unlisted savings banks) have turned out to be heavily exposed to (1) a strong dependence on international wholesale financing, (2) a domestic property crash and, along with other Spanish investors, (3) extensive Latin American risk. In early October, Spain became the first European nation to follow the U.S. plan and set up an agency with the directive to spend up to 50 billion euros (USD 68 billion) to buy assets from banks in trouble and to promote the smooth functioning of the credit markets. Prime Minister Jose Luis Rodriguez Zapatero said that the initial allocation would be EUR 30 billion and that the fund would buy Spanish assets from all banks operating in the country.

The government also increased the guarantee for deposits to EUR 100,000. Next came the announcement of an extra EUR 11 billion of urgent spending from the public till on infrastructure, the automotive industry and other targets. Mr. Zapatero boasted that the Spanish state was in a strong position to revive the economy because of its relatively modest debt burden and the fiscal prudence the Socialist government has demonstrated over the past four years. But he made it dear that it was of little concern to the authorities if the country now exceeded the 3% of GDP EU limit for national budget deficits.

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In the package, about EUR 8 billion was allocated to cash-strapped local authorities for the construction, rehabilitation and maintenance of infrastructure and buildings such as schools and hospitals. The remaining EUR 3 billion included EUR 800 million for the automotive industry (described by the Premier as a vital export sector) and EUR 600 million for the environment. All told, Mr. Zapatero said, the package called for 80 different measures, which together were designed to create 300,000 jobs. But total national unemployment in 2008 shot up by nearly a million, and the ranks of the jobless swelled for an eighth month in November to almost three million, for an unemployment rate that is now more than 12% of the workforce and is forecast to rise to over 15% by the end of 2009.

In part, this problem is long-term and structural, since Spain is no longer a cheap place to do business and its workforce is neither low-cost nor particularly productive. Mostly, though, it is linked to the property crash, which has exposed banks not only to homeowners who are no longer able to keep up their mortgage payments, but also, and more importantly, to thousands of struggling developers and construction companies. Household mortgages are, in fact, not where the real problem lies. In Spain, loan-to-value ratios are generally well below 80%. Moreover, mortgages cannot be cancelled by American-style "jingle mail," i.e., by dropping the house keys at the bank. Mortgages are secured by all of the borrower's assets, and most Spaniards bend over backwards to avoid default.

Much more of a problem have been loans to developers, builders and their suppliers. At the end of last June, total bank credit for property developers had ...