It is not just UK mortgage lenders that are suffering as a result of the sharp decline in the housing market. Spain's bankers are also worried. The country's past decade of growth has largely been based on the construction business, but it is collapsing around their ears.
Now Spanish banks, many of which took full advantage of the building frenzy, face the very real threat of having to deal with developers and real estate companies who are struggling to meet payments.
Concerns mounted after figures from the Spanish National Statistics Institute (INE) showed that house sales in Spain for January fell by 27% year-on-year.
In some areas of the country popular with British buyers, such as Catalonia and the Balearic Islands, sales dropped by 40%.
Another alarming factor for the banks is that total lending to homebuyers dropped by 28% to €13.4bn (£11bn) - the biggest decrease since 2004. The size of individual mortgages has also fallen by nearly 4%, as lenders fear for the security of their loans.
Asprima, an organisation which represents Spanish developers, compounded the gloom by predicting that house prices will fall by an average of 8% this year - a record unheard of since the recession of the 70s.
As the expected slowdown in the building sector turns into a fully-fledged crisis, Spain's banks will find themselves vulnerable to mortgage borrowers or developers defaulting on their loans.
A series of Spanish construction companies are already struggling to meet loan payments. The Barcelona-based developer Fbex has a debt said to stand at €600m and is negotiating with a number of banks. Another developer, Habitat, recorded losses of €444.4m, which put it in "technical bankruptcy". Mortgages and lending to builders account for nearly 60% of all loans extended by Spanish banks.
The forecast does not look hopeful. The Bank of Spain lowered its 2008 growth forecast to 2.4% - a cut of 0.7 percentage points - and cut its forecast for 2009 to 2.1%.
Miguel Blesa, president of Caja Madrid, Spain's second biggest mortgage provider, was the first to articulate the concern felt in many boardrooms. He said: "This puts fear among a number of banks that rely on the construction sector. There will be more problems in the property sector in coming months, since the market in new homes is paralysed."
The present difficulties have made investors such as pension funds and insurance companies cautious about backing banks whose major source of business is the real estate sector. Blesa said: "Investors fear any exposure to the real-estate risk from the banks and it will take time to eradicate this fear."
The depth of the problem has been seen in the Bolsa, the Spanish stockmarket, where the country's major banks have seen €36bn wiped off their market value since the start of the construction sector slowdown last year.
The Bank of Spain sounded the alarm in 2006, pleading with banks and mortgage lenders to rein in loans as the building bubble appeared ready to burst after house prices had risen by 150% in a decade. But the warning fell largely on deaf ears.
The European Central Bank is providing funds to Spanish banks and taking mortgages as security. But Jean-Claude Trichet, the ECB president, had only bad news for Spain's bankers when he said: "The worst is yet to come."
Miguel Martin, the president of the Spanish Banking Association (AEB), admitted that, until the recovery arrives, debt defaults will increase and coverage will shrink.
Martin, whose body represents commercial banks but not publicly owned savings banks, said it was now more realistic to expect future lending to grow more in line with "nominal GDP", referring to the nominal economic growth of 7% last year.
"The banks have to get used to the fact that credit will not be growing at rates of 25%," he said.
But in an attempt to calm fears, Martin said Spain's commercial banks had high levels of solvency compared with European competitors.
The Bank of Spain's governor, Miguel Fernández Ordoñez, has ordered a closer watch on the cashflow of banks.
In an attempt to restore confidence, Spain's deputy prime minister, María Teresa Fernández de la Vega, said that the government would launch a series of measures to regenerate the construction industry, one of which includes a public housing programme.
Source.
Guardian.co.uk