Debts & Loans

A few years ago, they paved over much of Spain with concrete. Now it is Spanish property companies that are piling up in the skip. Most of their struggles are concentrated in the highly geared but unlisted companies that make up 90 per cent of the sector. But even giants are struggling. Metrovacesa, Spain's largest property company, is set to be acquired in a debt-for-equity swap. Having failed to raise enough money by selling HSBC's Canary Wharf headquarters back to the bank, the Sanahuja family has handed over 54 per cent of the business it controlled to settle the €4.5bn it borrowed to fund their stake.

Spain's listed banks and unlisted savings banks are no strangers to playing landlord; during the 1990s recession they busily swapped loans for shares. Last year, they escaped the subprime crisis mostly unscathed. Today, though, they have been taken unawares by the speed with which the country's property sector has caved in. Metrovacesa's collapse is almost a systemic issue: its €7bn of debt accounts for almost a seventh of all Spanish banks' bad loans.



The outlook is turning ugly. Banks' exposure to the property sector is about €300bn, Credit Suisse estimates. That is equivalent to about a fifth of total risk-weighted assets. That is a huge concentration of risk given that total Spanish non-performing loans are already 3 per cent of risk-weighted assets. Factor in rising unemployment - likely to rise sharply from current levels of about 13 per cent - and the non-performing loan ratio could quickly reach 4.5 per cent.



Until recently, the Bank of Spain could take a bow for introducing counter-cyclical bad debt provisioning measures designed to provide a comfortable capital buffer for Spanish banks. Yet, sometimes even too much is not enough. As the property sector crumples, expect consolidation among Spain's savings banks to accelerate, and further capital raisings, such as Santander's recent €7.2bn issue.