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THE ROLE OF SPANISH BANKS
  IN SPAIN’S DEBT CRISIS.
Akwasi Fosuhene
468312
European Business Environment
  Page 1
Contents
Executive Summary _________________________________________________________________3
Preface ___________________________________________________________________________4
Introduction _______________________________________________________________________5
The Coming together of Europe ________________________________________________________6
A common monetary Union and the Euro_________________________________________________8
A Union in Debt ____________________________________________________________________9
Spanish angle of the crisis ____________________________________________________________11
Housing Bubble and Burst____________________________________________________________12
Role of the Banks __________________________________________________________________13
Measures taken so far_______________________________________________________________16
Conclusion _______________________________________________________________________17
Bibliography ______________________________________________________________________19




Page 2
Executive Summary
For decades and centuries even, European Countries has been at loggerheads with each other. It was thought
that, if Europe were to leave in peace and becoming a formidable strengths the rising power of the United
States and the USSR they ought to come together. Thus decades following the Second World War, the made
frantic efforts to coming together through a series of agreements and harmonizing their national laws and
economies .

By the early 2000s most of Europe had already come together and in their bid to further integrate their
economies the Euro was born. This was heralded as a major feat and seen as the next step to creating a
political union out of Europe akin to the United States. But then as everything was flourishing, the housing
markets in America collapsed sending financial ripples across Europe due to the intertwine nature of the
American and European economies.

Spain which, the fourth largest European economy was experiencing a streak of economic success with a ten
year uninterrupted growth. Just like America, the Spanish housing markets was high on the rise but there were
clear signs its runaway success was going to be short lived, and so it did. By 2008, the Spanish housing market
which had had tremendous growth cane to a screeching halt. This left most of Spanish savings banks known as
"Caja" with large toxic debts due to their very risky lending during the estate market boom. The Spanish
government has had come in to rescue the banks from collapse through bail out packages largely from the EU.

The government has taken a series of restructuring measures for the ailing banks as well as austerity
measures aimed at reducing government spending.

This report takes a look at how Spain got into the sovereign debt crisis that has engulfed the nation, and the
contribution of their banks to this problem.




Page 3
Preface


I started working on this research with very little expectation. At first I thought there not going to be that
much information and literature to find on the top. But his changed when I began to work on it. There was a
WSJ video which goes at length to discussing the underlying problem of the Spain’s’ sovereign debt crisis and
this was very instrumental in helping me get a good idea of this topic.

I got a lot of insights into the formation of EU, Eurozone and the Spanish debt problem as a whole.

I thank John for reading over for me.




Page 4
Introduction
Austerity, protests, increased taxes, Greece”; it is almost impossible to escape these keywords in the world
media. All the over the world, there is increased debate over sovereign debt crisis that has engulfed much of
the world, especially Europe. The effects of this is a breakdown of t

Within the Eurozone, several countries, including Spain, Portugal, Ireland, Italy and most especially Greece are
having troubles prepaying loans because the interest rates have risen to very high levels. A lot of the money
that are owned by these countries are from banks within Germany and France and quite on top of that
Spanish and Irish banks are having to deal with a lot of toxic debt

The Spanish sent crisis although not as grossly overstated as that of Greece exhibits the problem with Europe.
If not curtailed, it has the potential to send ripples across the while region.

However, unlike Greece , the problems is not with large government borrowing but rather an overzealous
banking sector which sought to make the most out of real estate boom.

Spain currently has the highest unemployment rate of any Eurozone country but with austerity measures fully
in place it remains to be seen how they are able to solve their unemployment problem. The EU on its part has
pumped quite a lot of money into Spain in a bid to rescue it from failing but it will be interesting to see how
much further they are willing to go.

To put things in context, it is important to first establish how the European Union was formed, how the Euro as
common currency for the Eurozone came into being, how it links up with Spain and the contribution Spanish
banks made to the sovereign debt crisis in their country,




Page 5
The Coming together of Europe
For decades, centuries even, most European countries were at loggerheads with each other. Fighting on a
wide variety of issues and over almost everything. Both the first and second worlds can both be attributed to
this. Shortly after the Second World War, most European countries were struggling to cope with the troubles
that come after a war. A lot of them were hit really hard and were struggling financially.
Through this, European countries came to the conclusion that it was time they ended the war among
themselves and come closer together. They were caught between two great super powers of the United
States and the then USSR. But in order to stop fighting they needed something that will bring them together
and make war a less suitable option in the future. They need to come up with something that will put them
together, something they will all benefit and if that was achieved the hostility among nations will be
diminished.
At the backdrop of this, they sought to come close together and work to building a stronger economic, social
and political ties. The then West German, Netherlands, Belgium, Luxemburg and France met in Paris in and
formed what was known as European Coal and Steel Community (ECSC) 1951. Four years later, The United
Kingdom assumed observer role in this newly formed community.
This precipitated into a trading area, largely trading in coal, coke, steel scrap and iron ore as well as building a
bond that will bring their political and military strength together. By March 1957, Italy had joined the group
and lead to the signing of the Rome treaty that year. However, it has by then the focus has then shifted into as
the Rome treated lead to the establishment of European Atomic Energy Community (EURATOM). This was to
lead efforts in the development of atomic energy research and practical applications. Then a year later, the
European Economic Community (EEC) was formed. The main reason for this formation was to remove the
barriers that existed between the different nations and come together to form a common market for services,
goods capital and a host of others. In a sense, the Europe Union as we know of it together largely came to
fruition kicked off from this moment.
To this point, the rather young community of likeminded European countries have cooperated very minimal
friction until France stepped in a bid to reduce the power of what was now becoming supranational
organization. Another minor difficulty was that three agreements has been signed by the same national but
they were separate by themselves which had the potential to create misunderstand and overlap of functions
so in a bid to curtail this , they came together in 1965 to combined all these three different agreements to
make it one. The final details of the agreement did not suffice until two years later in Brussels. The
combinations of the three agreements then came to be known as European Communities (EC). Throughout
the 70s and 80s, more and more surrounding countries began to see the appeal of this the community of
European countries and so countries like Denmark, United Kingdom Ireland and later Greece, Spain and
Portugal joined in. 1East Germany Automatically became part of the group after uniting with their western
counterparts. In February 1992, what has now come to be known as the European Union was signed in
Maastricht was signed by all the members of the European Community. By 1995, Finland, Austria and Finland
has joined the group making it bigger than ever before.


Over several decades following the Second World War, European countries have been able to move from
constant hostility to a strong trading block of nations who are strong together than ever before. However been

1   http://www.cvce.eu/obj/negotiations_for_enlargement-en-19a4fd81-119d-4090-bfac-c7cc8ae64a20.html

Page 6
faced with a new challenge of having to deal with sovereign debt crisis is something that will make or break
the Union. Will Europe come out of this stronger or it will end up splitting them? In this document, several
aspects of how Europe’s debt crisis with clear emphasis on what role Spanish banks contributed to the debt
crisis will be take a close look at while




Page 7
A common monetary Union and the Euro
All this while that most of Europe has been coming together , they had their currencies, it was thought that if
they needed to take their coming together to a different height, they need to more than just making
agreements. They needed to take more frantic steps at integrating their economies by having a common
banking sector and adopt a single currency. A currency which will go on to be called the Euro, and so they did.
In 1999the Euro came into force, becoming a noncash monetary unit. By January 2002, the use of the
common European monetary unit came into full swing with member of 11 members adopting the euro as
their currency. 2 By 2011, the monetary zone has grown to 17 countries adding 6 more countries to the
original 11. 3

To ensure that the world has a stable monetary standard, the United States decided to abolish pegging the
dollar to the official price of gold. This in effect paved way for the abolishing of a static exchange rates.
European countries have grown through the years of finding better ways integrating their economies and
having stronger trade. However this will be impeded by currency fluctuations. There was more than 2.25% of
exchange rate fluctuations between EU countries, this was not good for trading. But to put things in gear,
they Union had to put in place certain mechanisms that they will set things in motion and pave way for a
smooth transition the Euro. This was known as the European Exchange Rate Mechanism (ERM).

The creation of the single currency for Europe allowed the region more than ever brought countries within the
sub region together. They could benefit from better trade among themselves due to the non-existence of
exchange rates, fluctuations and other complexities that comes with it. Among other reasons, the coming of
the Euro into existence was highly regarded as monumental feat with very little complications, at least at the
onset. I was also seen as a step closer to seeing a more federal Europe akin to the United States of America. In
a way, the Euro gave Europe a sort of identity.

The formation of the Euro would not have been possible if all the nations still had their own centralized banks.
Thus in a run up to the adoption the Euro by the current 17 countries they all had to abandon their individual
central banks and wield power to what will become known and the European Central Bank (ECB). Within this
was the European Monetary Union. Note that not all the 27 European Union member states had the Euro as
their currency but collectively all they all form part of a wider group known as Economic and Monetary Union
(EMU).

The formation of the EMU was a way that will help European countries to synchronize their economic and
fiscal policies so that they are all at parity with each other. Also part of the responsibilities of member
countries was a promise to fulfill certain basic guidelines such as keeping their trade deficit to a certain
minimum rate.4




2 http://ec.europa.eu/economy_finance/euro/why/index_en.htm
3 http://www.ecb.int/euro/intro/html/map.en.html
4 http://europa.eu/abc/12lessons/lesson_7/index_en.htm


Page 8
A Union in Debt
All the while, the Eurozone has had a jolly ride with very little complications until 2009 when the housing
bubble in the United States burst. After the burst of the dot com boom, stock markets hit rock bottom. The
United States Federal Reserve in their quest to spur investment and spending, they reduced interest rates. For
investors such as mutual and pension funds who bought treasury bills, this became very unattractive to them
as the return of just 1% was simply not enough. However, they came with an idea, since borrowing has
becoming cheaper, they thought of a way to connect home owners to other investors by packaging home
loans with other loans and selling them off.5 Collectively they were known as Collateralized Debt Obligations
(CDO’s)6. The banks went on to further insure them to guarantee their payment for a small fee which was
known as Credit Default Swaps (CDS’s)7.

The growth of the housing market in the United States had basically been fueled the very tremendous growth
by what is known as sub-prime mortgages. Home buyers were lured into buying property at a very low
“teaser” interest rate and after a while, the rates will be readjusted for another rather. At this time, the people
who were given the loans to make the purchases could not afford the new rates anymore and this lead to
several people defaulting on their loans. Loans were given to people who had very high risks and in no
position to pay for the houses that they have bought but the banks gave them money anyway. At this point,
banks around the world came to the realization that they had to write of several billion of money since they
were left with “toxic debt”, European banks had become part of this.



While the EU debt crisis were in some ways similar to what happened in the Unlike the United States, the
causation were in other ways different. The United States for instance has a common fiscal policy which
regulates all the states, Europe has no such thing. Countries were allowed to freely spend and borrow with
very little regulation. The Stability and Growth Pact 8which was supposed to keep various governments within
the EU in check when it comes to their spending only required governments to limit their budget deficit to
three percent of their Gross Domestic Product(GDP). Most countries including Greece were spending way
more than they were required to but the EU did very little to stop them. 9. It was only after the financial crisis
that they made moves to curtail the spending of countries.

As at that time that Europe was coming together, one major thing that was overlooked was the fact that
different countries within the Union had different growth rate and development. Countries like Germany,
Netherlands, Finland, Austria, were very highly developed and with strong economies. However, most
countries in the Mediterranean region such a Greece, Spain, Italy and Portugal did not have such strong


5 http://simplifyreality.com/?p=1057
6 http://www.investopedia.com/terms/c/cdo.asp
7 http://www.globalresearch.ca/credit-default-swaps-evolving-financial-meltdown-and-derivative-disaster-du-

jour/8634
8 http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm

9 http://www.bloomberg.com/news/2010-05-17/euro-dies-slow-death-without-one-fiscal-policy-commentary-

by-matthew-lynn.html

Page 9
economies. On every policy that was agreed on, they agreed on them as Union and not taking in
consideration the peculiar challenges that each countries has. Without having much though about the
economic growth and disparity that exists between the different countries there was always going to be a
problem with the countries with weaker economies. That became apparent when the world economy started
to tumble, most northern European Countries were doing just fine while their southern counterparts had
troubles coping. One of the “hotspot countries”: Greece upon joining the Eurozone lied about their debts and
trade deficit and for the EU to provided and even challenging situation as all estimates and projections made
was based on false figures.

Once it became clear that Greece was in a bad financial than first though, It posed serious risks to the stability
of the Eurozone. Creditors started doubting if Greece was going to be able to pay their debt in the long term
and because of that most of them moved in to demand what Greece owned them. Greece was put under
intense pressure to pay back loans they owned to creditors.

It became evident that Greece needed bailout to service its massive debt. In May 2010, the IMF and EU
agreed to lend Greece €14.5 billion. 10This was part of bigger rescue page totaled at €130 billion.11 As a
requirement of Greece for the financial bailout from the EU, they had to agree to series of measures that will
help cut government spending and this put the country under extreme austerity leading to several protests
across the country.

Other countries such as Spain, Portugal and Italy followed suit. Any country with bad dynamics became
susceptible and this posed serious threat to Europe’s banking system. It became even more serious from
summer 2011 onwards, when the crisis wen just beyond Greece, Ireland and Portugal to threated Spain and
Italy which were much bigger economies with bigger bond markets. Since many European banks had lend out
massive amounts to Spain and Italy they become very exposed. Real panic came when the debt crisis hit Italy
due to its size. Unlike smaller economies, bailing them out was almost impossible due to its size.

The EU by its makeup is very in making slow in arriving at decisions and thus not being able to react to
problems that can easily be fixed if confronted soon enough.




10   http://www.reuters.com/article/2012/03/20/us-greece-payment-idUSBRE82J0GQ20120320
1111   http://www.reuters.com/article/2012/03/20/us-greece-payment-idUSBRE82J0GQ20120320

Page 10
Spanish angle of the crisis
Once the Eurozone countries started getting into financial difficulties and issues of sovereign debts, it was only
a matter of time before it reached Spain. However Spain’s woes will have a lot more detrimental effect on the
region than Greece and Ireland. It was the fourth largest Europe’s’ economy just behind The Germany, France
and Italy12. The Spanish problem was in some ways different and other ways similar to what has happened in
countries such as Ireland and Greece. The Spanish crisis was generated primarily by the bursting of the
housing market bubble in 2008 akin the housing market bubble of United States and Ireland, long term loans,
sharp increase in unemployment which is not the highest in the Eurozone hovering around 24%13. By 2012,
Credit rating Finch agency had downgraded Spain debt rating to BBB sighting the country’s high-level of
indebtedness as a major reason. 14

The Spanish economy had a buoyant period, massive construction with a 150% increase in prices of housing
properties. The growth was largely driven low interest rates and immigration. When the Spain changed over
their currency from the Spanish Pesta to Euro, it caused interest rates to reduce thereby making borrowing
relatedly easier than before. Immigration also contributed by making the demand for homes and other
property high on demand. By the middle of 2008, the economy has had 1 years of uninterrupted growth. The
Spanish economy was high on the rise, but there were clear indications that the boom was not sustainable in
the long run. 15

By the first quarter of 2009, the Spanish economy had begun showing signs of weakness with the economy
contracting by 3.7% and further reduction of 0.1% in the begging of the following year. 16

For months, the Spanish government was in denial. They never were never willing to admit to the fact that
their economy was in dying need of help or a bailout that other countries such as Greece has gotten. 17 Finally
the government gave in asked for help. Spain formally asked for a €100 billion bailout from the EU. However,
unlike that of the bailout given to Greece this was without any strings but rather they have to only have to
agree to reform tied to its banking sector. This was heralded by Spain’s Prime Minister Mariano Rajoy claimed
it was not a bailout. i




12 http://en.mercopress.com/2012/01/02/spanish-government-confirms-euro-zone-fourth-largest-economy-is-
in-recession
13 http://news.yahoo.com/spains-unemployed-inching-5-million-085011874--finance.html

14 http://www.ft.com/intl/cms/s/0/3175685e-b081-11e1-8b36-00144feabdc0.html#axzz2IW9th7d7

15 http://www.ft.com/intl/cms/s/0/32cd35d0-f68b-11da-b09f-0000779e2340.html#axzz2IW9th7d7

16

http://web.archive.org/web/20090610212457/http://www.forbes.com/feeds/afx/2009/02/18/afx6064245.ht
ml
17 http://www.ft.com/intl/cms/s/0/776a8116-a34b-11e1-8f34-00144feabdc0.html


Page 11
Housing Bubble and Burst
For a long streak of time, 1996 to 2008, the Spanish housing markets witness extensive growth unprecedented
growth. The growth of the housing market were largely fueled by a variety of interlinked factors. A major roles
was mass immigrations which ensued in the mid-90s due to immigrations reform which made Spain an
attractive country for immigrants. Foreigners makes up to 10% of Spain’s current total population. Spain had
traditionally had large families where children stayed at home to till their thirties. But once they started to
integrate more with Europe, this started to change. Youngsters were more willing to live on their own than
with their parents. Changes in age structure and reduction of the normal household size. As well due to the
booming economy, people had more disposable income. All these factors put together created a surge for the
increase in housing property.

Investors and banks jumped on and rapidly increasing the price of their properties. People felt that if they did
not purchase a property it will go way beyond their means in the short time so most home buyers who were
not financially sound to make purchases bought homes. This encouraged developers to build more houses, in
areas where there were very few amenities such as water, electricity and gas to make it inhabitable. Suddenly
the housing market became very attractive for investors and banks. 18Bankers on their part capitalized on the
housing boom by lending to developers and selling them at inflated prices.

Another twists to the Spanish real estate boom was that, developers bought the lands to build houses,
however the reason they built the houses was not to rent it out to families at affordable costs and make a
profit out of it but rather they were looking at gaining a windfall from the sale of the lands and make a fortune
out of it. Unfortunately for the prices grew too high to the point that it was no longer sustainable, this
coupled with the global property market bust, the housing boom in Spanish also collapsed in 2008 living
several banks with massive toxic debts in their book. With the flourishing of the housing market also came
with it a boom of other sectors of the economy thus once the housing market collapse it took with it other
parts of the economy.

This has left banks and real estate developers with several unsold homes or uncompleted homes and those
that have already been occupied had to be ejected because they had defaulted on the payments for their
homes. During the boom, developers build 800,000 housing units in the year 2007 alone. IMF has said it will
take 4 and half years to clear unsold houses.




18   http://www.spanishpropertyinsight.com/2009/04/29/spanish-housing-market-bubble-and-bust-explained/

Page 12
Role of the Banks
The depth of Spanish debt problem and its repercussions on the Eurozone goes wide and deep. It is a far
bigger economy than Greece and Ireland with biggest unemployment problem within the Eurozone. This has
the potential to spill off into other neighboring countries since people will be willing to migrate to other
European countries in search of a working prospects.

After the burst, Spanish banks inherited the loans in almost €150billion in toxic property asset. Which
represents about 8.7% of all loans held by the country’s banks. 19The property market is now left with some
1.3million homes for sale, but demand is estimated at just a quarter of that. The Spanish problem shows
Europe is in a much deeper problem.

Unlike other Greece, the Spanish government had their borrowing under the control, it had clean books until
just the beginning of the financial crisis in 2008. Although the central government had clean books, its regional
government had accrued massive debts on their own. This has left a lot of the regional governments in
massive debts and will need the help of the central government to bail them out. Collectively, the required a
total of €36billion bailout for the year 2012 alone.

Spain is divided into 17 regional governments which have their own budges and are at will to borrow without
consulting the central government. During the times of economic boom, the borrowed heavily to lavishly
spend on new infrastructure and other projects. At the height of the boom, the regional governments enjoyed
a swell in tax revenue largely from immigrants who had come to work on the new housing projects. They
governments in the regions decided to spend lavishly infrastructural projects. But when the bubble burst, so
did the taxes stopped coming. They were then left with the fate of their finishing off the projects they had
already started or leave it to rot. To this effect they are left with only the option of having to rely on the central
government to help them pay off the debts that they owe.

The outfall of all this has left friction between regional government and the central government with some of
the regions and especially Catalonia demanding complete financial autonomy from the central Spanish
government. 20

There are however a few regional government which are not deep in debts. The region of Madrid has been
able to manage their affairs without needing a bailout from the central government. It has already covered all
its refinancing needs for the year. Other regions like Navarra, Galicia, Cantabria, Aragon and the Basque
Country have all managed to keep balanced book. 21




19

http://www.icbc.com.cn/icbc/investment/financial%20news/Level%20of%20Toxic%20Debts%20in%20Spanis
h%20Banks%20Reach%2017Year%20High.htm
20 http://www.creditwritedowns.com/2012/07/spanish-regional-government-debt.html

21 http://www.bbc.co.uk/news/business-18951575


Page 13
Through the time of economic prosperity, the country’s GDP ratio was declining even though the economy
was on the rise. Between 1999 and 2007, the country’s economy has declined from an annual growth of 3.7%
to 1%.

Before the height of the housing bubble, Spain had one of the best banking system, with high liquidity ration
and seeking for relevant proof before giving out loans to those seeking loan facilities. However when the
housing bubble started, they became less stringent, forgoing their long held tradition of adequate checkup
before giving out loans. They almost gave out money to anyone willing to buy a property. To put this in
perspective, it is important to illustrate the different types of banks that exists in Spain.

 Financial system in Spain is divided into two, between commercial banks and savings banks.22Commercial
banks (Santander, BBVA) are big and have numerous branches all across the country. They gave out short term
credit facilities to the private sectors. The savings banks, known as “caja” on the other hand specializes in
savings deposits and giving out loans. 23

The Cajas are somewhat like mutual banks which could be found in every corner of Spain with one bank for
almost every 1,900 Spanish people. Until very recently, Cajas were very much left unregulated part of the
Spanish banking sector. Since they were unregulated, they became the bank of choice for most developers as
well as people willing to buy a home during the housing market boom. 24They took full advantage of the
situation to give out loans and when the housing bubble wen burst, they were left with very large unpaid
loans. This allowed them to own about 56% of all housing mortgages in Spain. During the property, the banks
had a run of growth with the housing market boom. Another major problem is the banks took the loans to
lend to lender under a very risky scheme where they used the deposits of savers as deposits. 25

Just like their regional counterparts, the regional banks came in dire of funding during after the bubble burst.
Ratings agency Moody downgraded the credit rating of fifteen Spanish banks 26with banks are been forced to
sell houses for half the original price after the bubble. 27 By the middle of 2012, the value of the Spanish
property markets had fallen by almost 13%. This is the biggest drop in value since 2007. This sharp drop
further deepens the Spanish economy’s woes as it will be even more difficult for the economy to bounce back
to its former state. 28




22 http://www.mongabay.com/history/spain/spain-banking.html
23 http://www.guardian.co.uk/world/2012/jun/08/spain-savings-banks-corruption
24 http://gainspainscapital.com/2012/04/29/the-dirty-secrets-of-spains-banking-system-that-99-of-analysts-

fail-to-grasp/
25 http://www.bbc.co.uk/news/business-17549970

26 http://www.thisismoney.co.uk/money/mortgageshome/article-2159303/Spanish-house-prices-drop-13-

year.html
27 http://qz.com/36181/spains-housing-bubble-is-forcing-its-banks-to-sell-homes-at-half-of-what-was-paid-for-

them/
28 http://www.thisismoney.co.uk/money/mortgageshome/article-2159303/Spanish-house-prices-drop-13-

year.html

Page 14
In comparison to their savings banks counterparts, commercial banks such as Santander and BBVA are doing
fairly well. This is because they say they saw the bubble of the housing market was not going to last and thus
made arrangements that will safeguard their future.

 Spanish banks has become of major concern to the Eurozone because a large part of what they owe belongs
to other European banks and so therefore, their inability to bounce back will end out having rippling effect on
other countries and banks within the region. The recession and the slow growth pace of the Spanish economy
has made it even more difficult for the banks to be able to turn around their fortunes.




Page 15
Measures taken so far
For the Spanish economy to bounce back a lot of work has be done to restructure the whole economy
especially the banking sector. The Spanish government has already initiated measures to ensure than banks
especially the savings banks are more transparent in the way they do business. This has prompted state
prosecuted to order anti-corruption officials make an investigation into how banks operate29.

Under the proposal, they will take measures to make Spain more entrepreneur friendly, new regulation for the
pension scheme which will raise the retirement age from 65 to 67, set out spending ceilings for different
government agencies.

The Spanish government has also promised to institute a wide variety of reforms and outing in a place
austerity measures to reduce government’s spending and channel funds to where they are needed the most.
Thee believe that by restructuring the banking sector and public sector, they will be able to improve way for
investor confidence, something will need if they want to reduce the massive unemployment problem in the
country. 30

The banking sector has received a different bailout packages from the government and the European
Commission. They banks receive another €37 billion bailout from the European stability Mechanism. In return
they promised to restructure their banking sector by laying off 28% of their employees and closing some of
their offices.

Another restructuring effort from the government is to create a so-called Bad bank where they will be able to
transfer all the toxic assets for the struggling banks. 31The difficulty here is it will be taking in its stride assets
that have very weak demand.

The European Union and IMF has also made a couple of their own recommendations that will help get the
country back on track. This includes broadening the tax net so that more business and people pay the
appropriate taxes, removal of red tapes for the setting up of businesses, sale of certain government assets,
restructuring of the healthcare sector ,deregulation of the energy sector. 32




29 http://www.eurointelligence.com/eurointelligence-news/news/singleview/article/prosecutor-launches-
criminal-investigation-against-bank-of-spain.html?L=0&cHash=1a968e25a553260fb15d0a17aef646a8
30 http://rt.com/news/spain-union-protest-mass-228/

31 http://www.euromoney.com/Article/3067434/Spains-bad-bank-Better-late-than-

never.html?Type=Article&ArticleID=3067434
32 http://www.bloomberg.com/news/2012-09-25/spain-pledges-more-reforms-factbox-of-steps-taken-and-

pending.html

Page 16
Conclusion
Without doubt, the contribution of the Spanish banks to their nation’s sovereign is enormous. While the
central government exercised prudence in spending banks and local government were borrowing and
spending on projects when the income generation stream is not there leaving banks with several toxic debts.

The sovereign debt in Spain, Greece, Portugal and other Eurozone countries shows the problem that exist
thing Europe. Not having a common fiscal policy shows how difficult it will be for the European Union to keep
the spending of member countries in check. The issues of disparity in develop between less developed
Sothern European countries and their more developed Northern European counties ought to have been taken
into account during the initial states of the Euro. The southern counterparts can just not keep pace with their
Northern counterparts due to different economics dynamics that exists between them.

Before the burst if the housing market bubble, Spain's economy high on the rise largely heralded as an
economic success. But even then it was evident that the success will not be long lived. Spanish regional banks
took full advantage of the situation are now been left with billions of toxic assets which has to be paid for with
the help of the EU and Spanish government. The interesting thing is how Spanish Cajas who have been so
conservative in the way they gave out loans because so overwhelmed that they gave out on the old tradition
of making proper background check of potential customers to ensure their credit worthiness. The Spanish
government for its part completely neglected the situation without taking any serious measures to ensure
that the prices for housing property and ...... sporadic ways if giving out of loans by the banks was curtailed.

The banks influenced the debt crisis by making finds freely available to developers who were willing to build
housing facilities at places with very little viability and prospective home owners.

The Spanish government with help from the EU and IMF have made quite a lot frantic efforts to ease problems
caused by the Spain’s sovereign debt crisis. The government has slashed down on its public spending and have
becoming more stringent on banks that they are helping to bail out. The banks excised a lot of poor judgment
in lending money out freely without doing due diligence of prospective borrowers. As banks they are
supposed to exercise good judgment and ensure that they only give out money to people who are credit
worthy.

Regional governments and the banks ought to have known that the housing boom was not going to be
sustainable in the long term. Building housing property in areas where there were no social amenities was
only going to turn into disaster in the future.

Moving forward it, the Eurozone and Spain need to come to terms with the reasons why this problem
occurred and how best to solve them if they do happen in future. I remains to be seen how Spanish banks will
be able to pay the debts that they have accrued as a result of toxic debt in the future.

The EU will have to be stringent on countries that they provide truth out and up to date information about the
strength of their economies, budgets deficits and other key performance indicators through mechanisms such
as the Stability and Growth Pact. Banks had to be properly regulated on how they acquire and invest money
not just by regulatory bodies but by other bodies from the EU which will ensure that they do not go back to
the situation that created the debt crisis in the first place. These major challenges that countries within the

Page 17
region are facing will act as litmus test for the future of the EU. It will give them the opportunity to face
difficult situations and make difficult decisions.




Page 18
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Page 20
Page 21

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Role of Spanish banks in Spain’s Debt Crisis

  • 1. THE ROLE OF SPANISH BANKS IN SPAIN’S DEBT CRISIS. Akwasi Fosuhene 468312 European Business Environment Page 1
  • 2. Contents Executive Summary _________________________________________________________________3 Preface ___________________________________________________________________________4 Introduction _______________________________________________________________________5 The Coming together of Europe ________________________________________________________6 A common monetary Union and the Euro_________________________________________________8 A Union in Debt ____________________________________________________________________9 Spanish angle of the crisis ____________________________________________________________11 Housing Bubble and Burst____________________________________________________________12 Role of the Banks __________________________________________________________________13 Measures taken so far_______________________________________________________________16 Conclusion _______________________________________________________________________17 Bibliography ______________________________________________________________________19 Page 2
  • 3. Executive Summary For decades and centuries even, European Countries has been at loggerheads with each other. It was thought that, if Europe were to leave in peace and becoming a formidable strengths the rising power of the United States and the USSR they ought to come together. Thus decades following the Second World War, the made frantic efforts to coming together through a series of agreements and harmonizing their national laws and economies . By the early 2000s most of Europe had already come together and in their bid to further integrate their economies the Euro was born. This was heralded as a major feat and seen as the next step to creating a political union out of Europe akin to the United States. But then as everything was flourishing, the housing markets in America collapsed sending financial ripples across Europe due to the intertwine nature of the American and European economies. Spain which, the fourth largest European economy was experiencing a streak of economic success with a ten year uninterrupted growth. Just like America, the Spanish housing markets was high on the rise but there were clear signs its runaway success was going to be short lived, and so it did. By 2008, the Spanish housing market which had had tremendous growth cane to a screeching halt. This left most of Spanish savings banks known as "Caja" with large toxic debts due to their very risky lending during the estate market boom. The Spanish government has had come in to rescue the banks from collapse through bail out packages largely from the EU. The government has taken a series of restructuring measures for the ailing banks as well as austerity measures aimed at reducing government spending. This report takes a look at how Spain got into the sovereign debt crisis that has engulfed the nation, and the contribution of their banks to this problem. Page 3
  • 4. Preface I started working on this research with very little expectation. At first I thought there not going to be that much information and literature to find on the top. But his changed when I began to work on it. There was a WSJ video which goes at length to discussing the underlying problem of the Spain’s’ sovereign debt crisis and this was very instrumental in helping me get a good idea of this topic. I got a lot of insights into the formation of EU, Eurozone and the Spanish debt problem as a whole. I thank John for reading over for me. Page 4
  • 5. Introduction Austerity, protests, increased taxes, Greece”; it is almost impossible to escape these keywords in the world media. All the over the world, there is increased debate over sovereign debt crisis that has engulfed much of the world, especially Europe. The effects of this is a breakdown of t Within the Eurozone, several countries, including Spain, Portugal, Ireland, Italy and most especially Greece are having troubles prepaying loans because the interest rates have risen to very high levels. A lot of the money that are owned by these countries are from banks within Germany and France and quite on top of that Spanish and Irish banks are having to deal with a lot of toxic debt The Spanish sent crisis although not as grossly overstated as that of Greece exhibits the problem with Europe. If not curtailed, it has the potential to send ripples across the while region. However, unlike Greece , the problems is not with large government borrowing but rather an overzealous banking sector which sought to make the most out of real estate boom. Spain currently has the highest unemployment rate of any Eurozone country but with austerity measures fully in place it remains to be seen how they are able to solve their unemployment problem. The EU on its part has pumped quite a lot of money into Spain in a bid to rescue it from failing but it will be interesting to see how much further they are willing to go. To put things in context, it is important to first establish how the European Union was formed, how the Euro as common currency for the Eurozone came into being, how it links up with Spain and the contribution Spanish banks made to the sovereign debt crisis in their country, Page 5
  • 6. The Coming together of Europe For decades, centuries even, most European countries were at loggerheads with each other. Fighting on a wide variety of issues and over almost everything. Both the first and second worlds can both be attributed to this. Shortly after the Second World War, most European countries were struggling to cope with the troubles that come after a war. A lot of them were hit really hard and were struggling financially. Through this, European countries came to the conclusion that it was time they ended the war among themselves and come closer together. They were caught between two great super powers of the United States and the then USSR. But in order to stop fighting they needed something that will bring them together and make war a less suitable option in the future. They need to come up with something that will put them together, something they will all benefit and if that was achieved the hostility among nations will be diminished. At the backdrop of this, they sought to come close together and work to building a stronger economic, social and political ties. The then West German, Netherlands, Belgium, Luxemburg and France met in Paris in and formed what was known as European Coal and Steel Community (ECSC) 1951. Four years later, The United Kingdom assumed observer role in this newly formed community. This precipitated into a trading area, largely trading in coal, coke, steel scrap and iron ore as well as building a bond that will bring their political and military strength together. By March 1957, Italy had joined the group and lead to the signing of the Rome treaty that year. However, it has by then the focus has then shifted into as the Rome treated lead to the establishment of European Atomic Energy Community (EURATOM). This was to lead efforts in the development of atomic energy research and practical applications. Then a year later, the European Economic Community (EEC) was formed. The main reason for this formation was to remove the barriers that existed between the different nations and come together to form a common market for services, goods capital and a host of others. In a sense, the Europe Union as we know of it together largely came to fruition kicked off from this moment. To this point, the rather young community of likeminded European countries have cooperated very minimal friction until France stepped in a bid to reduce the power of what was now becoming supranational organization. Another minor difficulty was that three agreements has been signed by the same national but they were separate by themselves which had the potential to create misunderstand and overlap of functions so in a bid to curtail this , they came together in 1965 to combined all these three different agreements to make it one. The final details of the agreement did not suffice until two years later in Brussels. The combinations of the three agreements then came to be known as European Communities (EC). Throughout the 70s and 80s, more and more surrounding countries began to see the appeal of this the community of European countries and so countries like Denmark, United Kingdom Ireland and later Greece, Spain and Portugal joined in. 1East Germany Automatically became part of the group after uniting with their western counterparts. In February 1992, what has now come to be known as the European Union was signed in Maastricht was signed by all the members of the European Community. By 1995, Finland, Austria and Finland has joined the group making it bigger than ever before. Over several decades following the Second World War, European countries have been able to move from constant hostility to a strong trading block of nations who are strong together than ever before. However been 1 http://www.cvce.eu/obj/negotiations_for_enlargement-en-19a4fd81-119d-4090-bfac-c7cc8ae64a20.html Page 6
  • 7. faced with a new challenge of having to deal with sovereign debt crisis is something that will make or break the Union. Will Europe come out of this stronger or it will end up splitting them? In this document, several aspects of how Europe’s debt crisis with clear emphasis on what role Spanish banks contributed to the debt crisis will be take a close look at while Page 7
  • 8. A common monetary Union and the Euro All this while that most of Europe has been coming together , they had their currencies, it was thought that if they needed to take their coming together to a different height, they need to more than just making agreements. They needed to take more frantic steps at integrating their economies by having a common banking sector and adopt a single currency. A currency which will go on to be called the Euro, and so they did. In 1999the Euro came into force, becoming a noncash monetary unit. By January 2002, the use of the common European monetary unit came into full swing with member of 11 members adopting the euro as their currency. 2 By 2011, the monetary zone has grown to 17 countries adding 6 more countries to the original 11. 3 To ensure that the world has a stable monetary standard, the United States decided to abolish pegging the dollar to the official price of gold. This in effect paved way for the abolishing of a static exchange rates. European countries have grown through the years of finding better ways integrating their economies and having stronger trade. However this will be impeded by currency fluctuations. There was more than 2.25% of exchange rate fluctuations between EU countries, this was not good for trading. But to put things in gear, they Union had to put in place certain mechanisms that they will set things in motion and pave way for a smooth transition the Euro. This was known as the European Exchange Rate Mechanism (ERM). The creation of the single currency for Europe allowed the region more than ever brought countries within the sub region together. They could benefit from better trade among themselves due to the non-existence of exchange rates, fluctuations and other complexities that comes with it. Among other reasons, the coming of the Euro into existence was highly regarded as monumental feat with very little complications, at least at the onset. I was also seen as a step closer to seeing a more federal Europe akin to the United States of America. In a way, the Euro gave Europe a sort of identity. The formation of the Euro would not have been possible if all the nations still had their own centralized banks. Thus in a run up to the adoption the Euro by the current 17 countries they all had to abandon their individual central banks and wield power to what will become known and the European Central Bank (ECB). Within this was the European Monetary Union. Note that not all the 27 European Union member states had the Euro as their currency but collectively all they all form part of a wider group known as Economic and Monetary Union (EMU). The formation of the EMU was a way that will help European countries to synchronize their economic and fiscal policies so that they are all at parity with each other. Also part of the responsibilities of member countries was a promise to fulfill certain basic guidelines such as keeping their trade deficit to a certain minimum rate.4 2 http://ec.europa.eu/economy_finance/euro/why/index_en.htm 3 http://www.ecb.int/euro/intro/html/map.en.html 4 http://europa.eu/abc/12lessons/lesson_7/index_en.htm Page 8
  • 9. A Union in Debt All the while, the Eurozone has had a jolly ride with very little complications until 2009 when the housing bubble in the United States burst. After the burst of the dot com boom, stock markets hit rock bottom. The United States Federal Reserve in their quest to spur investment and spending, they reduced interest rates. For investors such as mutual and pension funds who bought treasury bills, this became very unattractive to them as the return of just 1% was simply not enough. However, they came with an idea, since borrowing has becoming cheaper, they thought of a way to connect home owners to other investors by packaging home loans with other loans and selling them off.5 Collectively they were known as Collateralized Debt Obligations (CDO’s)6. The banks went on to further insure them to guarantee their payment for a small fee which was known as Credit Default Swaps (CDS’s)7. The growth of the housing market in the United States had basically been fueled the very tremendous growth by what is known as sub-prime mortgages. Home buyers were lured into buying property at a very low “teaser” interest rate and after a while, the rates will be readjusted for another rather. At this time, the people who were given the loans to make the purchases could not afford the new rates anymore and this lead to several people defaulting on their loans. Loans were given to people who had very high risks and in no position to pay for the houses that they have bought but the banks gave them money anyway. At this point, banks around the world came to the realization that they had to write of several billion of money since they were left with “toxic debt”, European banks had become part of this. While the EU debt crisis were in some ways similar to what happened in the Unlike the United States, the causation were in other ways different. The United States for instance has a common fiscal policy which regulates all the states, Europe has no such thing. Countries were allowed to freely spend and borrow with very little regulation. The Stability and Growth Pact 8which was supposed to keep various governments within the EU in check when it comes to their spending only required governments to limit their budget deficit to three percent of their Gross Domestic Product(GDP). Most countries including Greece were spending way more than they were required to but the EU did very little to stop them. 9. It was only after the financial crisis that they made moves to curtail the spending of countries. As at that time that Europe was coming together, one major thing that was overlooked was the fact that different countries within the Union had different growth rate and development. Countries like Germany, Netherlands, Finland, Austria, were very highly developed and with strong economies. However, most countries in the Mediterranean region such a Greece, Spain, Italy and Portugal did not have such strong 5 http://simplifyreality.com/?p=1057 6 http://www.investopedia.com/terms/c/cdo.asp 7 http://www.globalresearch.ca/credit-default-swaps-evolving-financial-meltdown-and-derivative-disaster-du- jour/8634 8 http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm 9 http://www.bloomberg.com/news/2010-05-17/euro-dies-slow-death-without-one-fiscal-policy-commentary- by-matthew-lynn.html Page 9
  • 10. economies. On every policy that was agreed on, they agreed on them as Union and not taking in consideration the peculiar challenges that each countries has. Without having much though about the economic growth and disparity that exists between the different countries there was always going to be a problem with the countries with weaker economies. That became apparent when the world economy started to tumble, most northern European Countries were doing just fine while their southern counterparts had troubles coping. One of the “hotspot countries”: Greece upon joining the Eurozone lied about their debts and trade deficit and for the EU to provided and even challenging situation as all estimates and projections made was based on false figures. Once it became clear that Greece was in a bad financial than first though, It posed serious risks to the stability of the Eurozone. Creditors started doubting if Greece was going to be able to pay their debt in the long term and because of that most of them moved in to demand what Greece owned them. Greece was put under intense pressure to pay back loans they owned to creditors. It became evident that Greece needed bailout to service its massive debt. In May 2010, the IMF and EU agreed to lend Greece €14.5 billion. 10This was part of bigger rescue page totaled at €130 billion.11 As a requirement of Greece for the financial bailout from the EU, they had to agree to series of measures that will help cut government spending and this put the country under extreme austerity leading to several protests across the country. Other countries such as Spain, Portugal and Italy followed suit. Any country with bad dynamics became susceptible and this posed serious threat to Europe’s banking system. It became even more serious from summer 2011 onwards, when the crisis wen just beyond Greece, Ireland and Portugal to threated Spain and Italy which were much bigger economies with bigger bond markets. Since many European banks had lend out massive amounts to Spain and Italy they become very exposed. Real panic came when the debt crisis hit Italy due to its size. Unlike smaller economies, bailing them out was almost impossible due to its size. The EU by its makeup is very in making slow in arriving at decisions and thus not being able to react to problems that can easily be fixed if confronted soon enough. 10 http://www.reuters.com/article/2012/03/20/us-greece-payment-idUSBRE82J0GQ20120320 1111 http://www.reuters.com/article/2012/03/20/us-greece-payment-idUSBRE82J0GQ20120320 Page 10
  • 11. Spanish angle of the crisis Once the Eurozone countries started getting into financial difficulties and issues of sovereign debts, it was only a matter of time before it reached Spain. However Spain’s woes will have a lot more detrimental effect on the region than Greece and Ireland. It was the fourth largest Europe’s’ economy just behind The Germany, France and Italy12. The Spanish problem was in some ways different and other ways similar to what has happened in countries such as Ireland and Greece. The Spanish crisis was generated primarily by the bursting of the housing market bubble in 2008 akin the housing market bubble of United States and Ireland, long term loans, sharp increase in unemployment which is not the highest in the Eurozone hovering around 24%13. By 2012, Credit rating Finch agency had downgraded Spain debt rating to BBB sighting the country’s high-level of indebtedness as a major reason. 14 The Spanish economy had a buoyant period, massive construction with a 150% increase in prices of housing properties. The growth was largely driven low interest rates and immigration. When the Spain changed over their currency from the Spanish Pesta to Euro, it caused interest rates to reduce thereby making borrowing relatedly easier than before. Immigration also contributed by making the demand for homes and other property high on demand. By the middle of 2008, the economy has had 1 years of uninterrupted growth. The Spanish economy was high on the rise, but there were clear indications that the boom was not sustainable in the long run. 15 By the first quarter of 2009, the Spanish economy had begun showing signs of weakness with the economy contracting by 3.7% and further reduction of 0.1% in the begging of the following year. 16 For months, the Spanish government was in denial. They never were never willing to admit to the fact that their economy was in dying need of help or a bailout that other countries such as Greece has gotten. 17 Finally the government gave in asked for help. Spain formally asked for a €100 billion bailout from the EU. However, unlike that of the bailout given to Greece this was without any strings but rather they have to only have to agree to reform tied to its banking sector. This was heralded by Spain’s Prime Minister Mariano Rajoy claimed it was not a bailout. i 12 http://en.mercopress.com/2012/01/02/spanish-government-confirms-euro-zone-fourth-largest-economy-is- in-recession 13 http://news.yahoo.com/spains-unemployed-inching-5-million-085011874--finance.html 14 http://www.ft.com/intl/cms/s/0/3175685e-b081-11e1-8b36-00144feabdc0.html#axzz2IW9th7d7 15 http://www.ft.com/intl/cms/s/0/32cd35d0-f68b-11da-b09f-0000779e2340.html#axzz2IW9th7d7 16 http://web.archive.org/web/20090610212457/http://www.forbes.com/feeds/afx/2009/02/18/afx6064245.ht ml 17 http://www.ft.com/intl/cms/s/0/776a8116-a34b-11e1-8f34-00144feabdc0.html Page 11
  • 12. Housing Bubble and Burst For a long streak of time, 1996 to 2008, the Spanish housing markets witness extensive growth unprecedented growth. The growth of the housing market were largely fueled by a variety of interlinked factors. A major roles was mass immigrations which ensued in the mid-90s due to immigrations reform which made Spain an attractive country for immigrants. Foreigners makes up to 10% of Spain’s current total population. Spain had traditionally had large families where children stayed at home to till their thirties. But once they started to integrate more with Europe, this started to change. Youngsters were more willing to live on their own than with their parents. Changes in age structure and reduction of the normal household size. As well due to the booming economy, people had more disposable income. All these factors put together created a surge for the increase in housing property. Investors and banks jumped on and rapidly increasing the price of their properties. People felt that if they did not purchase a property it will go way beyond their means in the short time so most home buyers who were not financially sound to make purchases bought homes. This encouraged developers to build more houses, in areas where there were very few amenities such as water, electricity and gas to make it inhabitable. Suddenly the housing market became very attractive for investors and banks. 18Bankers on their part capitalized on the housing boom by lending to developers and selling them at inflated prices. Another twists to the Spanish real estate boom was that, developers bought the lands to build houses, however the reason they built the houses was not to rent it out to families at affordable costs and make a profit out of it but rather they were looking at gaining a windfall from the sale of the lands and make a fortune out of it. Unfortunately for the prices grew too high to the point that it was no longer sustainable, this coupled with the global property market bust, the housing boom in Spanish also collapsed in 2008 living several banks with massive toxic debts in their book. With the flourishing of the housing market also came with it a boom of other sectors of the economy thus once the housing market collapse it took with it other parts of the economy. This has left banks and real estate developers with several unsold homes or uncompleted homes and those that have already been occupied had to be ejected because they had defaulted on the payments for their homes. During the boom, developers build 800,000 housing units in the year 2007 alone. IMF has said it will take 4 and half years to clear unsold houses. 18 http://www.spanishpropertyinsight.com/2009/04/29/spanish-housing-market-bubble-and-bust-explained/ Page 12
  • 13. Role of the Banks The depth of Spanish debt problem and its repercussions on the Eurozone goes wide and deep. It is a far bigger economy than Greece and Ireland with biggest unemployment problem within the Eurozone. This has the potential to spill off into other neighboring countries since people will be willing to migrate to other European countries in search of a working prospects. After the burst, Spanish banks inherited the loans in almost €150billion in toxic property asset. Which represents about 8.7% of all loans held by the country’s banks. 19The property market is now left with some 1.3million homes for sale, but demand is estimated at just a quarter of that. The Spanish problem shows Europe is in a much deeper problem. Unlike other Greece, the Spanish government had their borrowing under the control, it had clean books until just the beginning of the financial crisis in 2008. Although the central government had clean books, its regional government had accrued massive debts on their own. This has left a lot of the regional governments in massive debts and will need the help of the central government to bail them out. Collectively, the required a total of €36billion bailout for the year 2012 alone. Spain is divided into 17 regional governments which have their own budges and are at will to borrow without consulting the central government. During the times of economic boom, the borrowed heavily to lavishly spend on new infrastructure and other projects. At the height of the boom, the regional governments enjoyed a swell in tax revenue largely from immigrants who had come to work on the new housing projects. They governments in the regions decided to spend lavishly infrastructural projects. But when the bubble burst, so did the taxes stopped coming. They were then left with the fate of their finishing off the projects they had already started or leave it to rot. To this effect they are left with only the option of having to rely on the central government to help them pay off the debts that they owe. The outfall of all this has left friction between regional government and the central government with some of the regions and especially Catalonia demanding complete financial autonomy from the central Spanish government. 20 There are however a few regional government which are not deep in debts. The region of Madrid has been able to manage their affairs without needing a bailout from the central government. It has already covered all its refinancing needs for the year. Other regions like Navarra, Galicia, Cantabria, Aragon and the Basque Country have all managed to keep balanced book. 21 19 http://www.icbc.com.cn/icbc/investment/financial%20news/Level%20of%20Toxic%20Debts%20in%20Spanis h%20Banks%20Reach%2017Year%20High.htm 20 http://www.creditwritedowns.com/2012/07/spanish-regional-government-debt.html 21 http://www.bbc.co.uk/news/business-18951575 Page 13
  • 14. Through the time of economic prosperity, the country’s GDP ratio was declining even though the economy was on the rise. Between 1999 and 2007, the country’s economy has declined from an annual growth of 3.7% to 1%. Before the height of the housing bubble, Spain had one of the best banking system, with high liquidity ration and seeking for relevant proof before giving out loans to those seeking loan facilities. However when the housing bubble started, they became less stringent, forgoing their long held tradition of adequate checkup before giving out loans. They almost gave out money to anyone willing to buy a property. To put this in perspective, it is important to illustrate the different types of banks that exists in Spain. Financial system in Spain is divided into two, between commercial banks and savings banks.22Commercial banks (Santander, BBVA) are big and have numerous branches all across the country. They gave out short term credit facilities to the private sectors. The savings banks, known as “caja” on the other hand specializes in savings deposits and giving out loans. 23 The Cajas are somewhat like mutual banks which could be found in every corner of Spain with one bank for almost every 1,900 Spanish people. Until very recently, Cajas were very much left unregulated part of the Spanish banking sector. Since they were unregulated, they became the bank of choice for most developers as well as people willing to buy a home during the housing market boom. 24They took full advantage of the situation to give out loans and when the housing bubble wen burst, they were left with very large unpaid loans. This allowed them to own about 56% of all housing mortgages in Spain. During the property, the banks had a run of growth with the housing market boom. Another major problem is the banks took the loans to lend to lender under a very risky scheme where they used the deposits of savers as deposits. 25 Just like their regional counterparts, the regional banks came in dire of funding during after the bubble burst. Ratings agency Moody downgraded the credit rating of fifteen Spanish banks 26with banks are been forced to sell houses for half the original price after the bubble. 27 By the middle of 2012, the value of the Spanish property markets had fallen by almost 13%. This is the biggest drop in value since 2007. This sharp drop further deepens the Spanish economy’s woes as it will be even more difficult for the economy to bounce back to its former state. 28 22 http://www.mongabay.com/history/spain/spain-banking.html 23 http://www.guardian.co.uk/world/2012/jun/08/spain-savings-banks-corruption 24 http://gainspainscapital.com/2012/04/29/the-dirty-secrets-of-spains-banking-system-that-99-of-analysts- fail-to-grasp/ 25 http://www.bbc.co.uk/news/business-17549970 26 http://www.thisismoney.co.uk/money/mortgageshome/article-2159303/Spanish-house-prices-drop-13- year.html 27 http://qz.com/36181/spains-housing-bubble-is-forcing-its-banks-to-sell-homes-at-half-of-what-was-paid-for- them/ 28 http://www.thisismoney.co.uk/money/mortgageshome/article-2159303/Spanish-house-prices-drop-13- year.html Page 14
  • 15. In comparison to their savings banks counterparts, commercial banks such as Santander and BBVA are doing fairly well. This is because they say they saw the bubble of the housing market was not going to last and thus made arrangements that will safeguard their future. Spanish banks has become of major concern to the Eurozone because a large part of what they owe belongs to other European banks and so therefore, their inability to bounce back will end out having rippling effect on other countries and banks within the region. The recession and the slow growth pace of the Spanish economy has made it even more difficult for the banks to be able to turn around their fortunes. Page 15
  • 16. Measures taken so far For the Spanish economy to bounce back a lot of work has be done to restructure the whole economy especially the banking sector. The Spanish government has already initiated measures to ensure than banks especially the savings banks are more transparent in the way they do business. This has prompted state prosecuted to order anti-corruption officials make an investigation into how banks operate29. Under the proposal, they will take measures to make Spain more entrepreneur friendly, new regulation for the pension scheme which will raise the retirement age from 65 to 67, set out spending ceilings for different government agencies. The Spanish government has also promised to institute a wide variety of reforms and outing in a place austerity measures to reduce government’s spending and channel funds to where they are needed the most. Thee believe that by restructuring the banking sector and public sector, they will be able to improve way for investor confidence, something will need if they want to reduce the massive unemployment problem in the country. 30 The banking sector has received a different bailout packages from the government and the European Commission. They banks receive another €37 billion bailout from the European stability Mechanism. In return they promised to restructure their banking sector by laying off 28% of their employees and closing some of their offices. Another restructuring effort from the government is to create a so-called Bad bank where they will be able to transfer all the toxic assets for the struggling banks. 31The difficulty here is it will be taking in its stride assets that have very weak demand. The European Union and IMF has also made a couple of their own recommendations that will help get the country back on track. This includes broadening the tax net so that more business and people pay the appropriate taxes, removal of red tapes for the setting up of businesses, sale of certain government assets, restructuring of the healthcare sector ,deregulation of the energy sector. 32 29 http://www.eurointelligence.com/eurointelligence-news/news/singleview/article/prosecutor-launches- criminal-investigation-against-bank-of-spain.html?L=0&cHash=1a968e25a553260fb15d0a17aef646a8 30 http://rt.com/news/spain-union-protest-mass-228/ 31 http://www.euromoney.com/Article/3067434/Spains-bad-bank-Better-late-than- never.html?Type=Article&ArticleID=3067434 32 http://www.bloomberg.com/news/2012-09-25/spain-pledges-more-reforms-factbox-of-steps-taken-and- pending.html Page 16
  • 17. Conclusion Without doubt, the contribution of the Spanish banks to their nation’s sovereign is enormous. While the central government exercised prudence in spending banks and local government were borrowing and spending on projects when the income generation stream is not there leaving banks with several toxic debts. The sovereign debt in Spain, Greece, Portugal and other Eurozone countries shows the problem that exist thing Europe. Not having a common fiscal policy shows how difficult it will be for the European Union to keep the spending of member countries in check. The issues of disparity in develop between less developed Sothern European countries and their more developed Northern European counties ought to have been taken into account during the initial states of the Euro. The southern counterparts can just not keep pace with their Northern counterparts due to different economics dynamics that exists between them. Before the burst if the housing market bubble, Spain's economy high on the rise largely heralded as an economic success. But even then it was evident that the success will not be long lived. Spanish regional banks took full advantage of the situation are now been left with billions of toxic assets which has to be paid for with the help of the EU and Spanish government. The interesting thing is how Spanish Cajas who have been so conservative in the way they gave out loans because so overwhelmed that they gave out on the old tradition of making proper background check of potential customers to ensure their credit worthiness. The Spanish government for its part completely neglected the situation without taking any serious measures to ensure that the prices for housing property and ...... sporadic ways if giving out of loans by the banks was curtailed. The banks influenced the debt crisis by making finds freely available to developers who were willing to build housing facilities at places with very little viability and prospective home owners. The Spanish government with help from the EU and IMF have made quite a lot frantic efforts to ease problems caused by the Spain’s sovereign debt crisis. The government has slashed down on its public spending and have becoming more stringent on banks that they are helping to bail out. The banks excised a lot of poor judgment in lending money out freely without doing due diligence of prospective borrowers. As banks they are supposed to exercise good judgment and ensure that they only give out money to people who are credit worthy. Regional governments and the banks ought to have known that the housing boom was not going to be sustainable in the long term. Building housing property in areas where there were no social amenities was only going to turn into disaster in the future. Moving forward it, the Eurozone and Spain need to come to terms with the reasons why this problem occurred and how best to solve them if they do happen in future. I remains to be seen how Spanish banks will be able to pay the debts that they have accrued as a result of toxic debt in the future. The EU will have to be stringent on countries that they provide truth out and up to date information about the strength of their economies, budgets deficits and other key performance indicators through mechanisms such as the Stability and Growth Pact. Banks had to be properly regulated on how they acquire and invest money not just by regulatory bodies but by other bodies from the EU which will ensure that they do not go back to the situation that created the debt crisis in the first place. These major challenges that countries within the Page 17
  • 18. region are facing will act as litmus test for the future of the EU. It will give them the opportunity to face difficult situations and make difficult decisions. Page 18
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