Spanish and Irish property markets still stuck in slump mode | Business | The Guardian

Of all Spain's troubled banks, Bankia has the biggest exposure to failed property developments.

At the last count it had €37bn (£29bn) in loans to housebuilders, with a backlog of interest payments on almost three in 10. To make matters worse, the bank has €9.1bn of repossessed property sitting on its books.

Fears that Spain cannot cope without an EU bailout are fuelled by figures showing Bankia's toxic real estate assets, including loans in and about to fall into arrears to housebuilders and repossessed property, totalled €32bn at the end of 2011.

If it were an Irish bank, there is little doubt it would already be wholly nationalised and its worst performing loans split into a separate pool of toxic debt.

But Bankia, like most of its banking rivals on the Iberian peninsula, has suffered while politicians have disguised the extent of their losses.

The main shield for beleaguered Spanish banks is an opaque property market. Officially prices are 20% down from their peak – but the government bases its figures on valuations by the banks, which hold hundreds of thousands of repossessed properties on their books.

Analysts have long argued that it is not in the banks' interests to depress the values of their own properties to match sale prices, which is the usual measure of a home's value. But there is no equivalent of the Halifax, Nationwide or even Land Registry monthly publications of sales data to provide a counterweight.

A study last month by Pompeu Fabra University, commissioned by the Tecnocasa property group, found that house prices have fallen 41% since the peak. Similar studies have drawn the same conclusion.

Meanwhile, official figures remain artificially high and protect the banks and building societies, known as cajas, from accepting they have an even bigger problem.

The Irish government took the opposite view in 2010 when it became obvious a property building boom had wrecked the finances of its main banks.

In September of that year, the Fianna Fáil-led government nationalised Allied Irish, its second-largest bank and the fourth to be taken into public ownership.

Toxic assets were separated into a National Asset Management Agency (Nama), which paid €32bn for a sprawling property and loans empire built up by the banks not only in Ireland, but across Europe and the US.

Only this week the Irish Comptroller and Auditor General said in its second special report on Nama that it overpaid for the assets, which it argues are worth 75% of the original price.

But the government took the view that the only way to restore confidence was to "kitchen sink" the bank's debts and guarantee to repay bondholders in full. Bondholders had provided loans to the banks, which were in turn loaned to developers.

Irish finance minister Michael Noonan argues that the economy is moving again because international investors can see that the situation, while difficult, is transparent.

But though exports are growing, the economy remains in recession and house prices have continued to fall. The most recent figures from the Central Statistics Office show prices were down 16.4% across the country in the year to April. The only ray of sunshine was a small rise in Dublin for the second month in a row, something that last happened in February 2007.

The number of problem mortgages in Ireland has also jumped as falling house prices combine with stubbornly high unemployment to make the situation worse.

More than one-in-seven Irish home loans are not being fully repaid in April and a total of 116,288 mortgages were either in arrears or had been restructured, up 8% compared with the start of the year.

The lesson for the Spanish is that coming clean about Bankia's debts is the first step, but not the end of the story.

via guardian.co.uk