Jan. 23 (Bloomberg) — Banks in Spain are being penalized as
fallout from the U.S. subprime market makes its way to the
country that contributes most to Europes economic growth.
Lack of demand forced at least five Spanish financial
institutions, including Banco Santander SA and Ahorro Corporacion
Financiera SV, to cancel mortgage-backed bond sales between
August and November, and no bank in the country has done a deal
since then, data compiled by Bloomberg show. The difference in
yields between AAA rated mortgage-backed notes and benchmark
interest rates has more than quadrupled since July, leaving Spain
with the widest spread in Europe, UniCredit SpA says.
Losses from rising home foreclosures in the U.S. are making
bondholders more wary as Moodys Investors Service forecasts a
15-fold surge in Spanish mortgage defaults this year. The
countrys interest rates have doubled since 2004, hurting the
bulk of borrowers who have adjustable rates. Home prices are
falling for the first time in a decade, and household debt is 130
percent of income, twice the ratio in 2000, Bank of Spain data
show.
“The subprime crisis is raising concerns about overheated
property markets, especially Spain, said Raphael Gallardo, a
strategist at Axa Investment Managers in Paris who helps oversee
600 billion euros ($876 billion) of assets. “The real estate
bubble is bursting. A lot of investors in Spanish mortgage-backed
bonds may be hurt.
Investor Concern
Spanish home loans account for 30 percent of the euro areas
$1.2 trillion of outstanding mortgage-backed bonds, and the
countrys banks are Europes second-biggest issuers after the
U.K., according to Milan-based UniCredit, Italys biggest bank.
Since July, banks have publicly sold 2.55 billion euros of
mortgage-backed debt, a fraction of the more than 72 billion
euros sold in the first half, UniCredit data show.
Lenders sell pools of mortgages to investors to transfer the
risk of borrower defaults and reduce the amount of capital
theyre required to hold as a cushion against losses. About two-
thirds of Spains mortgage-backed debt is sold to international
investors, according to the Bank of Spain.
“Investors are concerned that the Spanish housing market
will collapse as the U.S. market is doing now, said Meyrick
Chapman, a London-based rates strategist at UBS AG, Europes
biggest bank.
Sales Scrapped
Santander, Spains biggest bank by market value, scrapped a
1 billion-euro sale of asset-backed bonds in September, while
Ahorro Corporacion Financiera, the Madrid investment group owned
by 43 Spanish savings banks and known as Cajas, canceled the sale
of at least $2 billion of covered bonds. Banco Popular SA, the
third-largest bank, had intended to sell about $2 billion, and
Bankinter SA, No. 6, at least 500 million euros of debt. Caja
Madrid, No. 2 among savings banks, delayed the sale of 400
million euros of collateralized loan obligations.
Santander declined 4.8 percent, or 57 cents, to 11.27 euros
in Madrid, after touching the lowest in 1 1/2-years yesterday.
Banco Popular stock fell 1 percent to 9.51 euros and Bankinter
dropped 44 cents, or 4.4 percent, to 9.61 euros.
The price of mortgage-backed securities issued by Santander
in April dropped to 97.4 percent of face value from about 100 at
the end of June, data compiled by Bloomberg show.
Debt with a similar five-year average maturity sold by HBOS
Plc, the U.K.s largest mortgage provider, fell to 98.57 percent
in the past six months, while securities issued by Utrecht,
Netherlands-based SNS Bank NV decreased to 98.38 percent. Notes
sold by UniCredit fell to 97.87.
AAA rated mortgage-backed debt in Spain yields 0.90
percentage point more, on average, than the euro interbank
offered rate, or Euribor, up from 0.20 percentage point more in
July, UniCredit data show. The difference in the U.K. is 0.80
percentage point, and in the Netherlands, 0.60 percentage point.
Property Boom
Homeowners and developers owe Spanish banks 1 trillion euros
in mortgages, more than three times their obligations in 2001,
according to the Bank of Spain. The 443 billion euros of
commercial mortgages to property and construction firms makes up
about half of all corporate loans in the country.
Spain enjoyed the fastest-growing real estate market in
Europe as retirees and foreign buyers snapped up 20 percent of
the countrys houses over the past decade, according to Vacation
Homes Agency, a Madrid-based property industry trade group. The
average price of a home in Spain has more than doubled since 2000
to 290,500 euros, data compiled by Sociedad de Tasacion SA, a
Madrid-based property valuation company, show.
Price Fall
Deutsche Bank AG estimates Spanish house prices may fall as
much as 8 percent this year as the highest European Central Bank
interest rates in more than six years curb consumer spending.
Though loans arent designated prime or subprime, about 95
percent of the countrys mortgages have floating rates, according
to Frankfurt-based investment bank Dresdner Kleinwort. Spanish
developers and homeowners may be delinquent on 5.5 percent of
total property loans by the end of 2008, up from 0.37 percent
now, according to New York-based Moodys.
Spain is “more vulnerable than other economies, due to its
rapid lending development and the large amount of loans bearing
variable interest rates, said Jean David Cirotteau, a Paris-
based analyst at Societe Generale SA.
Bank Reserves
One reason Spanish banks may be able to weather a property
market slump is the countrys conservative reserving
requirements, according to New York-based Morgan Stanley, the
second-largest U.S. securities firm.
Banks on average have set aside reserves that account for
250 percent of their delinquent loans, compared with 63 percent
for the rest of Europe. The countrys central bank set rules in
December 1999 that help banks cushion against loan losses when
economic growth slows.
“With the current provisions, Spanish banks can face an
increase in defaults of at least three times the current
default rate on their loans, said Eva Hernandez, a bank analyst
for Morgan Stanley in London. “In most cases, the non-performing
loans account for less than one percentage point of total credit
awarded to clients.
Since November, none of Spains banks have raised money from
unsecured bonds in the fixed-income market either, according to
Bloomberg data.
As a short-term fix, they almost tripled borrowings from the
European Central Bank to a record 52.3 billion euros between July
and December, the biggest increase of any of the 15 member
countries. Theyre now the second-largest users of ECB credit
lines after German banks, accounting for 14 percent of borrowing,
up from 4 percent in July.
“This is an unsuitable situation for banks, because they
are financing long-term obligations on a short-term basis, said
Luis Sanchez-Guerra, a director at Ahorro y Titulizacion in
Madrid, Europes largest issuer of home-loan bonds that are
guaranteed by the lender. “Its similar to a family that needs
to finance their mortgage every week, instead of getting a 15-
year loan.
`Easy Credit
A rapid cooling of Spains housing market will reverberate
through Europe because the country has contributed more than a
third of new jobs in the region and accounted for almost a
quarter of consumer demand over the past two years, according to
Lombard Street Research Ltd. in London. Thats more than Germany,
where the economy is three times as large.
“This country has been living off easy credit since 2001,
said Gonzalo Bernardos, professor of economics at Barcelona
University. “Everything became so cheap that people started to
speculate. This is going to get worse.
To contact the reporter on this story:
Esteban Duarte in Madrid at
