Real Estate Crisis Threatens Spanish Economy

(page 2 of 2)

On top of that, banks have tended to liberally hand out loans. And because of the seemingly guaranteed property price rises, many mortgage providers did not require deposits.

This has resulted in a high number of mortgage defaults. So far, the €6.1 billion ($9.7 billion) currently outstanding accounts for a mere 1 percent of home loans. But experts predict that the percentage will increase fivefold by the end of the year. Should that happen, the reserves kept by credit institutes will evaporate. "The number of holes in the balance sheets frightens me," Miguel Blesa, President of Spain's biggest savings bank Caja Madrid, said recently.

The first high-profile victim of this development is the established real estate firm Martinsa Fadesa. The company was unable to raise the comparatively small amount of €150 million ($238 million). In the end the company's market capitalization of around €680 million ($1.1 billion) was dwarfed by debts of €5.4 billon ($8.6 billion). The current situation being what it is, it is only a matter of time before further mortgage companies get into trouble. Although far fewer Spanish investment funds funnelled money into products tied to US subprime loans compared to, say, German funds, the home-made crisis is at least as dangerous.

Zapatero Neglects the Crisis

Now these policies have come home to roost. In total, Spaniards have borrowed the equivalent of their country's gross domestic product. Mortgages make up 60 percent of the debt.

Those who do not pay their wages into the same bank as they got their mortgage from can expect a call soon. Worried lenders are inquiring in a friendly but firm manner, if it would not be possible for them to pay their wages into an account that secures their loans. Other banks—especially Deutsche Bank—are trying to reduce the share of bad debt by holding on to solvent customers by offering them favorable conditions.

The dramatic developments have only slowly started to register at Spain's most important address: For a long time Prime Minister José Luis Rodríguez Zapatero shirked away from calling it a crisis—and that despite economists saying Spain's economy had slipped into recession in the second quarter of the year. "Difficult conditions," "complex situation" or "fall in the rate of growth" is how Zapatero characterized the developments. The opposition in parliament jeered that the prime minister spent more time looking up synonyms for crisis than confronting the mounting problems.

Zapatero finally caved in a few days ago: For the first time he spoke publicly about a "crisis." But that in no way reassured the markets.

Provided by Spiegel Online—Read the latest from Europe's largest newsmagazine