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Hidden Problems in the Spanish Banks


The Banco Santander has applied to freeze all investments in their property fund. When was the fund last valued and when will it need to be revalued? Most of the banks in Spain have been removing bad debts in their accounts by taking the assets of the debtors, either at the value of the loan or even at the original market valuation. Thus it appears that they don't have large losses. They are now swamped with property and have all the costs of IBI, Community, security, etc. These assets must have to be revalued on a regular basis and these revaluations will show huge reductions. Thus the assets of the bank will reduce. Admitting to these losses at the bad debt stage is what has happened in UK and USA already. It has still to come to Spain.

UNLESS, they can hang on without revaluation until the market rises, when they could make capital profits by gradually selling off the portfolio as happened at the end of the last recession. However, this time the amount of surplus property, the lack of available credit (it's all locked up in the bank's property 'assets'!) and (surely?) the stricter revaluation controls of the public company regulators will catch them and they will crash in the same way as those elsewhere. It's not a happy prospect.

Which Banks are most likely to be affected?
All that lent heavily on property during the boom - and which did not? After the last recession, the Bank of Spain insisted that the Spanish banks have larger reserves in case of another collapse. However, they couldn't have foreseen (or effectively controlled) the amount of lending that went into real estate - nor the suddenness or depth of the collapse. Yet the Spanish banks outwardly seem to be relatively little affected - except that they don't have money to lend. That can only be because all their assets are tied up elsewhere - in bricks and mortar. Even if these are in their books at only the loan value, sales have now reached levels way below that so they must be holding significant paper losses. These will become apparent and accountable either when a revaluation occurs or when the banks sell at a loss in an attempt to gain at least some liquidity. It's difficult to find another explanation when one sees so many repossessions and major reductions in value, well below even the 'prudent' 70% of valuation lending figure. And that % was regularly exceeded by 110% loans and 'over optimistic' valuations. It can't be otherwise.

Campbell D Ferguson
F.R.I.C.S. Chartered Surveyor
Survey Spain
00 34 952 923 520

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