Spain has been in the throes of a housing bubble that is arguably worse than ours, since housing (narrowly defined) accounts for 5% of US GDP versus 18% of Spain’s.
And like the US, Spain’s mortgage banks have entered a financial crisis and are making heavy use of the ECB’s discount window. But oddly, this has gone almost completely without notice in the media, despite the issuance of a Moody’s report on this development. Reader Scott pointed me to a Telegraph story; I searched on Google News (which picks up stories from Bloomberg, Reuters, the Wall Street Journal, New York Times, and Financial Times) and found no other references.
And note that the silence can’t be explained by the size of the activity. The amount at issue is comparable to that of the Northern Rock bailout, making it proportionally more significant relative to the smaller Spanish economy.
From the Telegraph:
Spanish banks are issuing mortgage securities and asset-backed bonds on a massive scale to park at the European Central Bank, using them as collateral to raise money at favourable rates from the official credit window in Frankfurt.
The rating agency Moody’s said lenders had issued a record €53bn (£39bn) in the fourth quarter, yet almost none of the securities have actually been placed on the open market. Most have been sent directly to the ECB for use in “repo” operations.
“The market has shut down,” said Sandie Arlene Fernandez, the author of the report.
“Few, if any, of the transactions in the RBMS market (mortgage securities) have been placed since September. Some of the banks are hoping that the market will open up again but most are just preparing these deals to use as repos, which they can do since the ECB accepts AAA-rated securities,” she said.
The total volume of securities issued since the credit crunch began to bite in July has reached €63bn.
Reliance on the ECB window appears to have kept the mortgage sector afloat despite the sharp slowdown in the Spanish property market and the de facto closure of the capital markets for this type of business, allowing Spain to avoid the sort of mishap suffered by Northern Rock in Britain and Countrywide in the US.
The data appear to confirm suspicions that the EU authorities have carried out a covert rescue of the Spanish mortgage banking system.
It may equal the taxpayer rescue of Northern Rock in Britain, and possibly exceed it in proportion to the overall size of Spain’s economy.
The key difference is that the ECB rescue operation in Spain has been disguised. A veiled method is necessary since the eurozone lacks a clear-cut lender of last resort. The IMF has warned that this gap in the architecture of of the single currency could prove serious in a crisis.
Traders say the Spanish authorities are quietly turning a blind eye to use of the ECB window, and in some cases may be encouraging banks to go to Frankfurt – a claim denied by the Bank of Spain.
Moody’s said the total issuance of securities by Spanish banks last year reached €143bn, up 55pc on the 2006. Over €62bn were mortgage securities. The agency said the default rate was likely to rise, with mounting concerns among participants over a possible “housing crash”. Some of the mortgage securities have already begun to draw on their reserve funds.
David Owen, Europe of Dresdner Kleinwort, said Spain could face serious difficulties this year as the excesses of a decade-long boom finally catch up with the country.
“The size of the Spanish corporate sectors financial deficit is truly is really scary. It rose to 14.5pc of GDP in the third quarter of 2007 from 10pc in the first quarter. This must be a record for a relatively large economy. Clearly this is not sustainable. Cost imbalances have a nasty habit of unwinding, quickly and very painfully,” he said.
Mr Owen said Spain was acutely vulnerable since it cannot cut interest rates or let the currency slide to cushion the downturn. “Several years of no growth could now beckon. It will be very difficult for the economy to pick itself up again inside EMU,” he said.
Spanish corporate debt is now 112pc of GDP. The current account deficit is 10pc of GDP. These are both flashing red warning signs.
Among those issuing mortgage securities in the last two months are BBVA (€4.9bn), Caja Madrid (€2.4bn), Caja Catalunya (€1.6bn), CAM (€1.4bn), and Caja Castilla la Mancha (€800m).