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Spanish Banks UNABLE to Sell Toxic Real Estate Assets

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Spain’s markets are in a fix, and there seems to be no creditable solution in sight. In fact, there is no credit. Lending activity in the country has slowed down dramatically, having experienced its greatest fall this year (a record 2.64% decline till September). The property markets gone bust, and looks to have taken all the air out of Europe’s fourth largest economy. Borrowers keep defaulting, and homes foreclosing. The only thing that’s left soaring here is the national unemployment rate (22.6% at present vs. 7.9% in summer 2009).

Meanwhile, the banks seem to be even more cash-strapped than the population itself. The Spanish banking system was an important player in the country’s once robust real estate and construction markets, and still pays deeply for its generous missteps. Out of the total 1.79 trillion euros of outstanding loans that the banks currently hold, 308 billion euros is taken up by real estate, most of which is reportedly as good as gone. Spain’s property boom, much like the rest of the crisis-riddled world, was entirely misguided. Land development were largely concentrated in areas that have no real value; where given the current population trends, demand for units is not expected to materialise any time soon, not in the next 10-years at least. Banks then have a significant chunk of their money holed up in real estate that nobody wants to buy.

Spain’s financial sector was at the receiving end of both bailout funds and increased regulation following the global economic crisis of 2008. The public has coughed up 17.7 billion euros (and counting) to help keep banks out of the red; however, the number of surviving banks stands greatly reduced. Analysts believe that given the central banks increased demands for adequate cushioning; the end count is bound to be even smaller. Small to medium sized banks are expected to virtually go poof, since the majority of their business came from the property market, which now stands largely defunct.

Following the crash, property prices in Spain have witnessed massive downward reductions. Overall, home prices are now 28% lower than what they were in pre-bust days; whereas, land values have taken a hit of around 33%. As joblessness mounts and foreclosures become imminent, banks are expected to add even more real estate to their already overflowing portfolios. It is unlikely that these properties will be turned over anywhere in the near future; banks aren’t willing to unload at washout rates, and buyers refuse to pay stated premiums.

With the last government having largely failed to bring stability to the ongoing crisis, the newly elected popular party vows to not let the decline continue any further. The country’s problems, however, have outgrown its capacity to endure. The European debt crisis, of which Spain is an active participant, is nowhere near resolving itself. The nations industry is at a standstill; the bank’s hesitance (and apparent inability) to lend, coupled with the new leaderships proposed austerity drive can then only prolong this lull. Further, the banking systems present provisioning is based around best-case scenarios, if anything the government might have to pump in more funds to help keep the entire sector from falling under. I say, heads up ECB, another troubled soul comes your way.

Photo Credits: Chris Kimber via Flickr