First, the one year Euribor reference rate, which has been falling since the ECB started lowering interest rates in the autumn of last year.
And secondly the chart showing the average rate of interest charged by Spanish banks on new mortgages, which as we can see, has been rising steadily since December 2007.
The average interest rate charged by Spanish banks for new mortgages in January 2009 was 5.64%, meaning that the average cost of a new mortgage had gone up by 10.2% over January 2008 (when the rate was 5.1%), and by 1.1% when compared with December 2008. Meanwhile the Euribor reference rate looks set to close this month at all time record lows of 1.91%. In January - the last month for which we have data on mortgage lending - the Euribor rate was 2.27%.
The reasons lying behind this upward movement in Spanish mortgages are twofold. On the one hand the Spanish banks are having increasing difficulty raising finance due to their perceived risk level, and on the other they themselves have have been forced to raise the risk premium they charge to clients due to the rising levels of non performing mortgages they have on their books.
Basically what this means is that the ECB policy isn't working in Spain, and that despite the massive quantities of liquidity provided, the monetary conditions continue to tighten, and doubly so give that the real value of the rates charged (ie the inflation adjusted value) keeps rising automatically as inflation falls.
Mortgage lending in Spain more than halved in January while the number of homes started in the fourth quarter dropped an annualy 62 percent. The 51.7 percent year on year fall in mortgage lending for urban dwellings was the steepest in 12 straight months of decline.
House sales fell in January by 38.6 percent, figures published earlier this month showed, and Housing Ministry data showed the foundations of only 40,737 homes were laid in the fourth quarter - 62 percent fewer than in the fourth quarter of 2007, and 27 percent down on the preceding quarter. During 2008 as a whole, Spanish builders started 360,044 homes - a 41.5 percent fall on 2008. On the other hand 633,228 homes were completed last year, reflecting the optimist which prevailed in 2006/07 when the buildings were started at the height of the boom in 2006-07.
Spain has a supply overhang estimated at almost any number you like over 1 million unsold homes (the minimum estimate, and no one really knows), or more than three times the number of new households created each year in Spain.
The number of mortgages offered has crashed as banks restrict credit given forecasts non-performing loans will reach around 9 percent next year, while unemployment is now likely to rise above 4.5 million by years end, up from the current 3.5 million.
As I indicated in this post yesterday, we are moving from a situation where people the banks were afraid to lend, to one where people become increasingly afraid to borrow (since they don’t know when they will lose their jobs, or even their homes), with Spain's citizens becoming more and more reluctant to take on additional debt due to fears they could be caught in the next round of job losses.
As a result January mortgage lending falling to 6.47 billion euros, while the rate of new bank lending to households dropped to 3.9% year on year.
Spanish debt defaults leapt 197 percent in 2008, with construction and property firms accounting for 4 of every 10 failures. The number of firms and individuals that filed for administration rose to 2,902, the highest level on record, according to Spain's National Statistics Institute. Also bad loans at Spanish banks rose by 15.3 percent in January, the sharpest monthly increase since property developer Martinsa Fadesa filed for administration in July. Bad loans rose more than 9 billion euros to 68.18 billion in January compared with an average monthly rise in the last six months of around 5 billion euros.
The non-performing loans (NPL) ratio for all institutions was at 3.8 percent in January, up from 3.3 percent in December, with rates among savings banks the highest at 4.45 percent compared with 3.79 percent a month earlier. Commercial banks had an NPL ratio of 3.17 percent, up from 2.81 percent. In fact Spain's financial institutions have seen NPLs more than quadruple in the last 12 months from 16.23 billion euros in January 2008.
Spain's savings banks, responsible for about half the country's loans and the most exposed to the property market downturn, could see NPLs rise to 9 percent by 2010, according to the saving banks association.
What To Do With The Bad Banks?
As a result of all this a furious public row (unusual in Spain) has broken out over what to do with the broken banks.
The Spanish Economy Minister Pedro Solbes has said the government is prepared to recapitalise healthy banks but suggested that those with serious solvency problems should seek a merger rather than look for state aid.
"In cases where banks have acted correctly in relation to solvency and the health of their accounts...logically they could receive support," Solbes said in a speech to an economic conference in Madrid. "Banks that are unable to remain solvent and clean up their accounts should cease to be players in the financial system so they don't generate distortions in the public sector."
What he has in mind is that the troubled banks should turn to Spain's privately-funded Deposit Guarantee Fund (FGD) should they need capital injections to make tie-ups viable. However, the insurance fund holds only 7.2 billion euros in bank contributions, and since this is orders of magnitude less than the size of the problem it is obvious the government will end up having to putting money into the recapitalisation process, and especially into the Savings Bank sector, since the Spanish press has been reporting that 20 of Spain's 45 savings banks are now considering mergers. And it is obviously only a matter of time before one of the mid-sized Spanish banks like Popular, Sabadell or Banesto joins the consolidation process.
Clearly many of those most directly involved in the banking industry are laothe to accept the Solbes formula, since wuite simply they cannot afford it. And this was made pretty clear by Francisco Gonzalez, chairman of Spain's second largest bank BBVA, when he pointed out last week that nationalisation of the bad banks was the only realistic way forward.
"When a bank shows signs of extreme weakness the authorities should take control of it, which implies removing the directors and reducing or eliminating share capital in the institution," Gonzalez said at a conference in Madrid.Governments should then appoint a new team to separate toxic assets from healthy ones and quarantine them in publicly controlled funds, the chairman said, advocating a level of state intervention not yet seen in Spain. "Then the bank would be privatised again through a transparent sale to private companies," he said, without making specific reference to Spanish banks.
Two Spanish regional savings banks have already reached a preliminary merger deal - Unicaja, based in Spain's southern Andalucia region, and the smaller Caja Castilla La Mancha (CCM), located in the central-southern province of the same name - following talks which were carefully brokered by the Bank of Spain. Clearly this merger willl need to be followed by a capital injection from Spain's Deposit Guarantee Fund to help them clean up the "troubled assets" which will naturally be found in the combined accounts of the new bank which emerges. Many other such regional caja "weddings" are obviously soon to follow. But the big question is, where will all the financing come from? It is pretty clear that the problem which is building up is bigger than Spain can handle alone, and finance (not loans) from the European Union will be needed, with centrally backed EU Bonds being the most likely mechanism with which to fund the injection.