Report that Spanish real estate could fall in value 50% and bring the banking system down with debts too big for all the counties in Europe together even to absorb, so may require an international funded bailout:

Europe is threatened by an acute crisis in Spain’s banking system and predictions seen by Channel 4 News suggest a 50 per cent fall in house prices could force Spain to seek an international bailout.

The focus of the crisis in Spain’s financial system is Bankia, a bank made from the forced merger of seven bankrupted savings banks, known as cajas.

The cajas were broken by a decade of reckless lending, to fund property developers in Spain’s building boom. Combining them into Bankia hasn’t solved the problem.

The government has already taken a 45 per cent stake in Bankia, and will today have to find as much as 15bn euros more to restore the bank to something resembling financial health.

But analysts increasingly fear that Bankia’s woes are merely the beginning of the crisis of Spanish banking. Because while many of the bad loans to property developers and commercial property have been recognised, a mass of bad lending to homeowners still hasn’t been accounted for.

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And when it is, the results will be catastrophic.

Research by the boutique investment house Variant Perception suggests that house prices in Spain will fall as far as 50 per cent below their peak values.

This would be a disaster for anyone owning a home, especially those with large mortgages. But the banks are dealing with this problem in a surprising way – trying to hide it.

“Many of the Spanish banks didn’t want to take losses so if someone couldn’t pay their mortgage they were offered a modification,” says Jonathan Tepper, an economist at Variant Perception.

“That might be paying a lower rate, having the mortgage extended – if they didn’t pay it wasn’t a problem. So that’s one way they’ve hidden their losses. As the Americans say – a rolling loan gathers no loss”.


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