Spain's finance minister Pedro Solbes has stunned the markets with an admission that his country faces the worst economic crisis in its history as the full effects of the property crash spread through the economy.
"This crisis is the most complex we have ever lived through given the plethora of factors on the table at the same time," he told Punto Radio in Madrid, breaking with past efforts to put a reassuring gloss on events.
Mr Solbes said the Madrid bourse had suffered an "earthquake", crashing 27pc since the start of June. He blamed the toxic cocktail of high oil prices, the global credit crisis and the sharp slowdown in the key export markets of North America and Germany.
The comments follow this week's bankruptcy of Martinsa-Fadesa, Spain's biggest corporate failure. The property developer - with an empire of housing estates, hotels, shopping malls and hotels - collapsed after failing to refinance €5.1bn (£4bn) of debts. The company's demise was a textbook story of aggressive over-expansion at the top of the cycle, driven by high debt gearing. It has €11bn of assets.
Mr Solbes has pursued a rigorous "no bailout" policy, saying Martinsa-Fadesa took "excessive risks" and must now face the consequences. He has reportedly clashed with cabinet colleagues, who are now searching for any means to stop the downward spiral in the economy.
El Pais reports that house prices crashed by 20pc in the second quarter compared with a year earlier, based on 183,000 completed transactions.
The Martinsa-Fadesa collapse has sent tremors through the whole property and construction sector. The share price of giant developer Sacyr has halved over the past month.
The two banks with most exposure to the Martinsa-Fadesa are Caja Madrid, at €900m, and Banco Popular, at €400m.
Goldman Sachs has issued "sell" recommendations on a clutch of Spanish banks, including Bankinter, Banco Popular and Banco Sabadell, warning that the sharp turn in the credit cycle could prove worse than the recession in the early 1990s. "The consumer is more leveraged today than in any of the previous cycles," it said.
The ratings agency Standard & Poor's has not yet taken a decision on whether to downgrade Banco Popular and Caja Madrid.
In reality, this is unlikely to be the worst economic crisis in Spain's history. Philip II defaulted on his sovereign debts three times in the 16th century after he bankrupted the Spanish Empire to pay for his Counter-Reformation wars against Protestants. He crippled the Italian banking system in the process - much to the benefit of London and Amsterdam.
Source Kyero.com