Bankruptcy

Spain: Big Dreams ? Were Dreams

By mcbride

In the fourth largest economy using the Euro, Spain has become a poster child for shattered dreams.   ?The decade through 2007 was a heady one for Spain. Flush with foreign investment and cheap credit that came with the arrival of the euro, it saw ambitious [real estate] projects sprout everywhere. This was in stark contrast to the conservative approach to development that long held sway here. Spain until recently was so frugal and had so little purchasing power that Spaniards referred to “Europe” as the continent beyond the Pyrenees.

Now, many Spaniards are bemoaning the folly of it all. In the town of Ciudad Real, a newly built airport goes largely unused and is saddled with millions of euros in debt. In Zaragoza, a mid-sized city between Madrid and Barcelona, cutting-edge fairgrounds, intended for use as a business park, sit empty two years after a world’s fair.?  Moreover, the banks are taking a course familiar to many by extending loans which in other times would have been called due rather than simply pushed into the future. 

?Instead of disclosing troubled credit, many Spanish lenders have chosen to refinance loans that could still prove faulty and to report foreclosed or unsold homes as assets, often without posting their drop in market value. Even after many banks passed this summer’s government-imposed ?stress tests,? economists believe such assets still pose a danger.

One risk, says Luis Garicano, an economist at the London School of Economics, is that Spanish lenders could follow in the footsteps of Japan’s so-called zombie banks, ?holding on to capital in order to cover their losses.?

For years after the collapse of Japan’s economic boom in the early 1990s, the country’s banks held on to troubled properties and other non-performing assets as they lost value, in hopes that the market would recover. That kept capital tied up in a languishing sector, preventing lenders from financing more vital sectors of the economy. By 2002, 8.4% of all loans in Japan were non-performing, according to Japanese government figures.

In Spain, that figure hit 5.4% in June, up from less than 1% just three years ago.?

Here is a link: http://online.wsj.com/article/SB10001424052748704476104575439783253733728.html

Michael

Full post as published by Texas Lawyer Blog on September 16, 2010 (boomark / email).