Cajas in the balance Premium

Banks have crumpled throughout Europe but the real economy is more or less alright. In Spain, it is the other way round. The economy is in recession, unemployment is soaring and the property market – one of the world’s most elevated – has crashed. Oddly, however, Spanish banks seem to be fine.

This is largely thanks to counter-cyclical provisioning measures imposed by the Bank of Spain, a prudence that has now borne fruit. In the red corner towers Santander, the eurozone’s largest bank by market capitalisation. In the blue corner stands BBVA, Europe’s fourth largest. Yet their robustness is atypical. Half of Spain’s financial system consists of 45 unlisted mutuals owned by local governments, called cajas. They are entirely domestically focused, therefore highly exposed to property, and also – because they cannot raise equity – potentially short of capital.

An estimated 70 per cent of cajas’ combined €900bn loan portfolio is in real estate. Bad debts doubled last year and Credit Suisse expects them to double again to 5 per cent, twice the current European average. Add in the odd bankruptcy – such as property developer Martinsa Fedesa’s recent collapse – and this could eliminate the cajas’ provisioning cushions. That presents a problem. Debt markets are in effect shut. And only one mutual, Caja del Mediterraneo, has dared to issue non-voting profit certificates, an equity proxy, to raise fresh funds. Although the certificate’s price was supported in the aftermarket by other cajas, CAM’s credit default swaps still ballooned.

Not all cajas are as well padded as Barcelona-based La Caixa, which can sell down its multi-billion euro industrial holdings if needs be. Rescue deals for some of the smaller, more opaque banks look inevitable. The financial fuse on Spain’s property bomb is burning slowly. But the bang could still be big.

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