What does Cajasur’s problems tell us about Spain’s banking sector, property market and economy?

Over the weekend Cajasur one of Spain’s regional caja’s or savings banks was taken over by the Bank of Spain. It had previously been in merger talks with one of its fellow cajas since back in July 2009  and in essence Unicaja, a bigger and profitable savings bank in Malaga, was going to take it over. However these talks broke down on Friday evening and within a few hours the Bank of Spain had stepped in as Cajasur on its own no longer had a viable future. Whilst in itself Cajasur is not massively structurally significant the principles behind her failure are as she was heavily involved in the ailing Spanish property market and is an example of how there has  been very little reform of the Spanish banking system so far. And of course this comes just after Spain has announced further austerity measures for her public-sector. This is not an inspiring combination in my view. There are indeed echoes of how Japan behaved in the early 1990s when trouble hit her banking sector in this.


This regional savings bank represents around 0.6% of the assets of the Spanish banking sector and had a loan book of approximately 13 billion Euros. The bank was based in Cordoba and was in fact run by the Roman Catholic church which had formed it in 1864. However she had the highest level of non performing loans in the Spanish banking system at an estimated rate of 7.9%. Losses were beginning to mount as after losing some 596 million Euros last year she had lost a further 114 million Euros in the first quarter of this year.

Plainly the business was no longer viable, however there is an interesting and revealing fact from Friday’s events. Yet again (by turning down a merger) we have a bank board which seems to have been what psychologists would call “in denial”. In spite of the seriousness of their position they felt able to turn down the merger. This sort of “denial” has been very common as banks have hit trouble around the world during the credit crunch.

The caja’s (cajas de ahorros)

These are a group of regional savings banks in Spain which are unlisted and were usually formed for charitable purposes. There are 45 of them and there are in many ways similar to building societies in the UK although there was never the wave of  de-mutualisations which occurred in the UK.

However as Spain’s property boom developed the Cajas did begin to behave like some of the demutualised UK building societies in that they stepped up their share of lending to the property sector. In essence they grew faster than their listed peers such as BBVA and Santander during Spain’s decade-long construction and property boom, in part because they lent more to real-estate developers. As the housing bubble started to deflate and the economy went into recession at the end of 2008, Spanish banks saw their bad loans rise at unprecedented speed,according to the Bank of Spain non-performing loans are at a 14 year high.

However there are a lot of questions as to whether even these high levels of non-performing loans fully represent the state of the caja’s finances and to look at this fully one needs to consider Spain’s property boom. Even in the current situation half of the cajas are estimated to need to merge. Of course you may be wondering like me how mergers will particularly improve things if the real problem is non-performing loans. There is the suspicion of things being concealed and swept under the carpet.

Spain’s Property Boom

As one looks back over the last decade it becomes clear that Spain had as large a housing bubble as that of Florida or Ireland. An example of this is that property prices rose in real teams, by over 100% between 1999 and 2007.  However in a tale familiar to many property booms that led to the credit crunch there was no slacking or reduction in the pace as Spain’s banks and cajas continued funding one of the largest real estate booms in the world such that 860,000 housing starts took place in 2006. Indeed two-thirds of the housing units built-in Europe between 1999 and 2007 were built in Spain. By the end of the construction boom (end of 2008), the stock of loans to real estate developers and builders reached almost 500 billion euros, which is equivalent to half of Spain’s GDP. This lending bonanza appears foolish in hindsight and investment banks now estimate that up to 50% of loans to developers will be irrecoverable. (Thank you to a paper from the LSE by Vicente Cuñat and Luis Garicano for these figures).

But the Spanish property market does not appear to have fully adjusted to this new reality.  So far Spanish house prices have fallen by much less than you might expect considering the scale of the building that went on and the rush to lend to the sector. Societe Generale estimated recently that they had fallen by not much over 10% so far. You get the feeling that the pain is being spread out over a longer period and is being delayed which is where echoes of Japan and her experience come in.

Bringing the cajas and the property market together

One cannot but help the feeling that losses on Spanish loans to her property market are set to continue and probably accelerate as it would appear that her property market still has a fair bit of adjustment to do. It is also true that problems in the commercial property market often take their time to fully develop. In terms of individuals ability to service their loans then an unemployment rate now over 20% cannot help.

By the end of the property boom the cajas were providing 50% of the loan finance so unfortunately they expanded their lending just at the wrong time which is a familiar theme during the credit crunch for various institutions. But as you look at the 45 cajas right now there has been very little reform with only 2 of them including Cajasur in the hands of the Bank of Spain. I cannot avoid the view that more needs to be done and Spain has been delaying this hoping for economic growth as a way out again just like Japan in the 1990s.

Spain’s economy and fiscal deficit

Where is this relevant is if we feed the state of the property market and the cajas into Spain’s overall economy. If one takes the view that Spain’s government was hoping for economic growth to help bail out the cajas and the property market then one can also see why it was anxious not to extend its austerity programme as it plainly did not want any negative impact on Spain’s growth prospects. However Spain has been pressurised by events into a new tougher austerity plan as I wrote on the 14th May.

There will be further cuts amounting to 0.5% of Gross Domestic Product(GDP) in 2010 and a further 1% of GDP in 2011 which added together come to cuts of approximately 15 billion euros. The plan is to reduce Spain’s fiscal deficit to 6% of GDP in 2011/12 which contrasts with a level of 11.2% in 2009/10. She still plans to meet the euro zone’s’s 3% of GDP target in 2013

So the austerity programme increase is likely to impact on Spain’s economic growth adversely. It is also plain I think that Spain was hoping for economic growth to bail out her property market and cajas in effect a type of waiting game. Of course effects from these will feed back into economic growth and indeed Spain’s fiscal deficit. Indeed whilst I type this how different this approach feels to that of Ireland who approached her fiscal and property market problems much more decisively. Before this crisis is over I suspect Spain may end up wishing that she had done the same.

Furthermore today’s financial news is full of other countries who are Spain’s trading partners all talking or planning austerity measures. For example the UK will announce some £6 billion of public-sector cuts and even Germany is now planning a fiscal reduction of some ten billion Euros. It could be a difficult few years for Spain.


Whilst Cajasur in itself is not particularly significant the principles behind it are. For example if the Spanish press is accurate and the total losses on its loan book do approach 2 billion Euros then as its capital was only 229 million Euros a few concerned eyes might turn to other cajas and wonder what the real state of play is. So there is the fear that provisions in the caja sector as a whole will have to rise and one cannot avoid the feeling that the cajas will be less likely to loan money going forwards probably just at the time the Spanish economy most needs finance.

So from a situation where Spain’s financial sector was well-regarded due to the way it was regulated cracks are beginning to appear and as she has delayed many reform to her cajas and her fiscal problems they are appearing at the same time. Only time will tell whether these delays were a minor or a major mistake. But there are echoes of how Japan responded to her property crisis in how Spain has behaved and that is hardly a recommendation when you consider what happened next in Japan.


8 thoughts on “What does Cajasur’s problems tell us about Spain’s banking sector, property market and economy?

  1. I been struggling for the past year with the continuing assertion that the Spanish banking system was well regulated. As a nation you have only to look around and see a country that has been for a decade an explosive speculative developer. Perhaps we used the lack of exposure to off balance sheet as a guide to good governance and ignored the bigger problem of massive overleverage .

    It appears that the caja’s have been allowed to behave like the US savings and loans,which ended in a bust. As further caja’s inevitably hit the buffers will the Bank Of Spain look to rope in BBVA and Santander as unwilling rescuers?In particular with Santander I hope and pray the UK FSA has done its homework to ensure there UK operations are fully insulated from Spain’s difficulties.

  2. Hi Shaun and thank you for the informative post.

    In the comparison with Japan, does it make any difference that Japan could print money but Spain cannot?


    • You would think that it would be a difference but then there are two counterpoints to that. One never has a “blind test” comparison but Japans experiment with QE does not appear to have done her much of a favour and it looks as though the ECB is doing the best it can to flood European markets with liquidity and get as near to QE as it can.

      I suspect what Spain probably misses most is the ability to devalue on her own. One irony of the so-called punishment of th euro zone which involves its currency falling is of cause a benefit to Spain (and others). But the “wolfpack” only get the blame never any praise…

  3. Hi Shaun,

    another lurker unmasking here – not within my remit to post on blogs at work 🙂 (I work for a local authority in statistics)

    Do we have any clue as to any potential further problems in Spanish banks beyond whats been highlighted?


    • Hi Chris and welcome
      There are various issues which add to this. I have seen several different numbers quoted as to how long it will take Spain to shift its housing overhang and it looks like somewhere in the range of 5 years or more. So unless something very fortunate happens this will get worse and the Spanish banks have made provisions for loans to property devolpers of only 13% of the total which is starting to look very light…

      A lot of the problem loans have been shuffled into the subsidiaries the Spanish banks have for this purpose. So rather than declaring a loan non-performing it then becomes collateral. I saw some figures in risk magazine which only show the main 2 banks but do highlight the scale of the problem.

      “For example, NPAs as a percentage of the loan book stand at 17% and 7.9%, respectively, for BBVA and Santander. However, when adjusting the NPA ratio to include acquired real estate assets, BBVA’s rises to 23.1%, while Santander’s jumps to 28.9%, suggesting Santander has been more active in purchasing underlying assets, according to research published by Barclays Capital in February.”

      So a problem is deferred but underlying such a strategy is hope for the future what if prices are static or even worse fall?

  4. Wow Shaun.. and only yesterday I was thinking of Spain in my blog’s “Worst Case Scenario” post…

    From the level of support needed, one can safely assume that the caja’s are in far worse shape than they let on. How much more belt tightening can Spain do without risking uprisings ? Their unemployment rate is 20%.. a depression. From what I see, there are no lights at the end of the tunnel either.

  5. It’s perhaps worth mentioning in the context of Cajasur that this situation has been developing for quite a while. The much mooted (and planned, with a committee drawn from both parties) merger with Unicaja – also of Andalucia – was stopped more or less at the last minute because the president of Cajasur could not get the powerful unions to sign to the new, slimmer joint structure. Basically there were two problems, the personalities did not seem to get on all that well and the Cajasur pay rates were higher than those in Unicaja, necessitating an adjustment. So rather than sort this out (which inevitably involved job losses and some political courage) the boss of Cajasur simply passed the problem to the Banco de Espana, who promptly put in more than half a billion Euros and opened an ‘expediente’ regarding previous management practices.
    I think this shows rather clearly the mindset that exists in at least some of the Cajas, they are by their nature provincial and they have (as Shaun says) tended to dabble in properties to far too great an extent. ‘Normas’ were clearly violated. The auditors have commented on this in the past, but it seems nobody was listening.
    The whole area of Spanish properties and their financing is a Pandora’s box and Cajasur is creaking the lid open. Local press in Spain states that between 860k and 920k new houses are completed or being completed but unsold. This is not good news. I have not seen the number of ‘normal’ years of sales that this represents, but it must be quite a few.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s