Two hundred kilometres south of Madrid is a potent symbol of today’s Spain. It is large, debt-fuelled, real estate-backed, riddled with regional politics and nobody wants to buy it. It is Aeropuerto Central Ciudad Real, the country’s first privately constructed airport, which opened in December 2008 with capacity to process 10 million passengers a year and one of the longest runways in Europe. Less than three years later it is now bankrupt – the last flight out, by Barcelona-based budget carrier Vueling, left at the end of October. The owner, AeropuertosCR, stopped payments on its debt in mid-2010 owing €290 million.
The doomed project was financed by two regional savings banks – Caja Castilla-La Mancha and Cajasur – both of which have collapsed and been taken over by the state, exposing alleged corruption in the airport’s construction contracts and revealing that up to 50% of the building work might have been illegal. It might not be entirely true that nobody wants to buy the airport, however. Local newspapers have recently reported that a gang of drug smugglers had been trying to purchase part of it to ease their transportation of cocaine into the country. This is probably not what the politicians had in mind when the scheme was first proposed.
Ciudad Real airport is only an extreme example of the kind of real estate folly that Spain’s banks are now faced with either trying to get rid of or provision against. The fallout from the country’s cheap credit-fuelled property boom will take years to tackle and is the reason why Spain’s situation is so different to the eurozone patient with which it is so often compared: Italy.
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| The now bankrupt Aeropuerto Central Ciudad Real. Large, debt-fuelled, real estate-backed, riddled with regional politics and nobody wants to buy it |
Italy has a straightforward sovereign debt problem. Spain does not. It has a complicated combination of a highly leveraged private sector and a banking sector that is too big and struggling to deal with the impact of foreclosed properties and bankrupt developers – all against the backdrop of an unsustainable and growing regional debt burden.
It is a toxic mix, and one for which policy solutions are often mutually exclusive.
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| The main enemy of Spain’s new prime minister, Mariano Rajoy, is likely to be the bond markets’ demands for ever-higher yields |
THIS IS WHAT MAKES THE TASK facing the new right-wing Partido Popular administration of Mariano Rajoy, voted in on a tide of discontent on November 20, so difficult. After his landslide victory Rajoy announced: "There will be no enemies for me other than unemployment, the deficit, excessive debt and economic stagnation." That would be more than enough enemies for most people but he also has the bond markets to contend with. Three days before the country’s election Spain paid 6.975% for 10-year bonds and immediately afterwards spreads, rather than recovering, flirted with 7%. It was a brutal indication of investor nervousness and the risk that it doesn’t matter what Rajoy does – Spain’s fate now lies in the hands of the European Central Bank.
As Richard McGuire, senior fixed-income strategist at Rabobank in London, commented: "Political developments at a local level are of limited consequence. In short, changing the actors is of no consequence if it is the stage that is the problem."
In the bond markets, Spain seems to be partly paying the price for Italy’s debt problems – the country itself has a debt to GDP ratio of just 60% compared with Italy’s 119%. But it is private-sector real estate-backed leverage that has long distinguished Spain from the pack with the exception of Ireland. The real estate problem pervades any conversation about the banking sector in the country. Along with the kind suggestion of a café con leche or a glass of water at a recent meeting in Madrid, Euromoney was rather taken aback to also be offered a two-bedroom condo on the coast with delightful sea views.
The country’s problems simply cannot be dealt with until the crippling legacy of its real estate boom is purged from the banking system. This has been the driving motivation behind the bank restructurings that have been undertaken so far. And it will drive the likely forced transformation of Spanish banking that is to come.
Spain’s real estate problem is very different from that of many other countries since 2007. Despite the decade-long housing bubble and aggressive use of securitization by Spanish banks to fund it, this is not a structured-credit crisis. It is a traditional real estate crisis caused by bad lending. And it is a land problem, not a mortgage problem. Recent figures from the Bank of Spain show that nearly 18% of non-performing loans in the banking sector relate to real estate and construction while only 2% relate to housing.
The scale of the problem is daunting. Official estimates show that the banking sector is exposed to roughly €300 billion of loans to property developers – 52% of which are deemed to be at risk ($176 billion). While these assets may have been largely originated by now-defunct or nationalized regional savings banks, there is now a risk that the problem will end up at the door of the healthy national lenders. This is because of the way in which the loans were originated and the way in which the Spanish government has so far tackled the restructuring of the system.
In the boom years, Spain’s banks lent to real estate developers in three ways: through unsecured credit; through loans for down payment on land to be developed; and loans to finance the balance of the purchase after down payment. The loans were usually structured with bullet repayments and were paid down on sale of the developed properties.
