Spain's property market: Tricks and mortar | The Economist

Spain's property market: Tricks and mortar The Economist

SPANISH banks have been doing their best to shield themselves from the bursting of the country’s property bubble. By buying properties before the loans on them go bad, lenders can mask their worst bets. Restructuring loans has the same effect. Help is now at hand from an unlikely source: the normally sober Bank of Spain. In July the central bank circulated guidance that relaxed provisioning rules on risky mortgages.
The change makes some sense. Until now, banks have had to make provision for the full value of high-risk loans—those above 80% of the property’s value—after two years of arrears. That was far too demanding, since property values rarely fall to zero. Under the new rules, they only have to allow for the difference between the value of the loan and 70% of the property’s market value.
Yet the timing is terrible, mainly because the move follows heavy lobbying from the banks. The Bank of Spain maintains that the net effect on the system will be neutral since it is also tightening rules for bad consumer loans. But the impression is that Spain’s central bank—one of the few to emerge from the crisis in credit—has moved the goalposts to help banks deal with the onslaught of bad property loans.
For Spain’s two largest banks, Banco Santander and BBVA, which have diversified abroad and reported decent second-quarter results this week, the new guidance will probably have only a marginal effect. But it will be a boon to smaller lenders with greater exposure to risky loans. Iñigo Vega, an analyst at Iberian Equities, estimates that the new rules would relieve banks of the need to make provisions of about €22 billion ($31 billion) in coming months (assuming non-performing loans reach 8% by the end of 2010). To put that into context, Spain’s savings banks, which are heavily exposed to developers, are expected to make profits of only €16 billion before provisions this year.
The new accounting guidelines will help Spanish lenders smooth out the effects of the property bust over time. But the risk is that the problems are merely postponed. The ratio of bad loans to the total, property included, has tripled to 4.6% over the past 12 months as unemployment appears to head inexorably towards 20%.
The true picture is worse still. Commercial banks have bought about €10 billion in debt-for-property swaps, according to UBS. Spain’s savings banks do not disclose the figure. Assume it is similar to their commercial peers and reclassify all these property purchases as bad loans, and then the non-performing loan ratio would be 5.7% (before any further adjustments for loan restructuring). Deferring losses to mañana doesn't change the extent of the difficulties facing Spain’s financial system.