Mark Stucklin
Caja Castilla La Mancha: Spain’s answer to Northern Rock
A Spanish Northern Rock
The guessing game as to which Spanish financial institution would be the first to do a “Northern Rock” is over. Last Saturday the Bank of Spain stepped in to bailout Caja Castilla La Mancha (CCM), a regional savings banks from the Castilla La Mancha region, providing the bank with 9 billion Euros of government-backed guarantees, and kicking out the top management.
Apparently there is no major problem with the CCM’s finances, or so the government would have us believe. According to Pedro Solbes, Spain’s Finance Minister, CCM is just suffering temporary liquidity problems, and there is no “black hole” in its balance sheet. Pull the other one.
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It’s always smoke and mirrors in cases like this. But we can be pretty sure there is a gaping hole in the bank’s balance sheet, after it lent willy-nilly to developers, went on a stupid expansion drive, and stumped up most of the cash for a 350 million Euro airport in the middle of nowhere. CCM’s bad debt ratio has hit 5% as loans to developers and home buyers have turned sour.
Trend setter?
Thanks the Spanish property market crash and the credit crunch, CCM may not be the last financial institution in need of a bailout. Bad loans and mortgage delinquencies will create a “big hole” worth as much as 10% of Spanish GDP for Spanish banks to deal with, says Xavier Sala i Martín, a professor of economics at Columbia University.
Speaking at a recent conference, Sala i Martín warned that the Spanish economy is too dependent upon the property sector, arguing that “some builders and developers have to fail,” to help rebalance the economy.
Construction and property sector debts add up to 300 billion Euros, or 27% of Spanish GDP, which Sala i Martín describes as a “catastrophe”. “And these figures don’t take into account what is coming next,” said Sala i Martín, quoted in the Spanish daily El Pais.
Sala i Martín also pointed out that paying the mortgage will soon be more difficult for many Spaniards as 1 million people lose their unemployment benefits.