Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Friday, 27 April 2012

State of Spain and Spanish Banks

This is dedicated to Senor Alfredo Saenz who must be one of the world’s most gullible bankers for declaring that “Mortgages get paid in good times and in bad”. It would come as a surprise to him that the correlation between unemployment and mortgage arrears in Spain is 0.78.

The collection of “stupid” graphs below shows the problem that Spain and Spanish banks face.

Graph 1: Doubtful loans to households for purchase and renovation
Source: Banco de Espana

Graph 2: Unemployment and doubtful loans (Dec-88 = 100%) (Correlation = 0.78)
Source: Banco de Espana

A possible reason why mortgage defaults have held in (on a relative basis) is because of low interest rates (Graph 3). However as unemployment rises, low interest rates will not keep mortgage defaults low. Moreover, as lenders shy away from Spanish banks, rates charged to borrowers are moving up.

Graph 3: Mortgage interest rates for mortgages have fallen consistently
Source: Banco de Espana

Despite this, NPLs have soared (Graph 4) and Coverage ratios have fallen (Graph 5).

Graph 4: NPL Ratio for lending to resident sectors
Source: Banco de Espana

Graph 5: Coverage Ratios falling in the face of rising NPLs
Source: Banco de Espana

A fall in coverage ratios implies that banks expect the bottom to be near. The theory being that as the economy and the housing market swing back into growth, NPLs will decline and coverage ratios will rise automatically. Unfortunately this is based on a large injection of Hopium as the last two graphs show.

Graph 6: Housing Affordability still high and above historical norm
Source: Banco de Espana

Graph 7: House Price Index is highly correlated to housing affordability
Source: Banco de Espana

And the pain in housing is going to be felt severely by the banks which have lent €1.05trn (~100% of Spain’s GDP) to the construction and real estate sectors. It comprises almost 60% of their total lending.

Graph 8: Bank exposure to construction and real estate sectors
Source: Banco de Espana


  1. Spanish banks should capitulate and decrease real estate prices by another 35 to 40% immediately in order to capture the money from the tourist during summer holidays. At a low bargain price some are likely to buy or will fly in to buy.
    At current prices (-27% from top) nobody buys as all expect the price to drop 35 to 40% over the next 2 years.

  2. How could you find data on doubtful loans before december 1998? I looked at the statiscal Bulletin published by the Bank of Spain but couldn't find the historic data for households..

    1. Hi Sophie, the data set is in Housing Market Indicators under Summary Indicators on the Banco de Espana site. http://www.bde.es/webbde/en/estadis/infoest/sindi.html