Saturday, January 22, 2011

Only the strongest survive

I don’t need to tell you that the construction industry here has been the hardest hit by the economic crisis. Spain is littered with stalled building developments and land values have plunged as the country tries to clear an excess stock of more than 700,000 newly built homes. This has put a lot of stress on the banks that have loaned money for future housing development projects; they will not see a return on their investments for quite a few years to come.

While major Spanish banks like Santander or BBVA can comfortably cope with their bad real estate loans, there are fears that some of the cajas, the savings banks, may not be able to. High levels of bad property loans at the cajas are seen as a major risk for Spain as it slashes its budget deficit to stave off fears  that it will need an Irish or Greek-style rescue from the European Union and International Monetary Fund.The number of cajas has already been reduced from 45 to 17 by means of  mergers to try and stave off the problem.

It is hoped that private investors can be found to put money into the cajas. However, Spain's Fund for Orderly Bank Restructuring could take stakes in those that are unable to attract outside investment. In a move to prop them up, Spain is to partially nationalise the weakest of the cajas and force them to become conventional  banks with stock market listings. The cost of this is estimated to be between 25 and 50 billion Euros which is within the 88 billion Euros set aside.

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