The Spanish banking system is a goner; London is next

If you value your life, don’t get caught standing next to a Spanish bank in the early part of this week. London-based Fitch Ratings downgraded Spain’s sovereign debt on Friday 28^th May, after markets had already closed; but they were simply taking note of a fact which Lyndon LaRouche has been warning about for months: That the entire Spanish banking system is a goner, and as it implodes, it will bring down the entire British banking system with it.

Spain’s banks are muy bankrupt—both its commercial banking segment, with about $1.8 trillion in assets, and its savings bank sector (or “cajas”), which is about the same size. Between them, they have over $540 billion in exposure to the Construction and Property Development sector—i.e., real estate speculation—where the speculative binge over the last two decades barreled ahead at about twice the rate of Britain’s, and three times that of the United States.

Today, about 37 per cent of that $540 billion in bank real estate exposure has gone sour, according to official statistics just published by the central bank, the Bank of Spain. The worst of it has either been written off outright (one per cent of the total) or foreclosed on (13 per cent). But there is an additional 10 per cent which is classified as “doubtful,” which means that nothing has been paid on it for more than 90 days. The banks have not yet foreclosed on these loans, only because they don’t want to carry more trash on their books—much as is happening in the U.S. And on top of all that, there is still another 13 per cent considered “substandard loans,” meaning they are rapidly heading towards 90 days, too.

Spain’s banks are engaging in cheap accounting sleight-of-hand to try to keep the reality of their bankruptcy at bay. Not only are they not calling in non-performing debt, in order to be able to still show it as assets on their books; they have also deferred losses where foreclosures have occurred, by taking direct control of the physical houses and property instead—on a massive scale. The largest Spanish banks, such as Santander and BBVA, have set up specialist real estate units to manage “NPAs” (non-performing assets) and try to sell houses directly to consumers.

How extensive is this? Well, a Barclays Capital report published in February says that NPAs as a percentage of loans to the real estate sector, officially stand at 17 per cent for BBVA, and 8 per cent for Santander. But when you adjust the NPA ratio to include acquired real estate physical assets, BBVA’s ratio rises to 23 per cent, and Santander’s jumps to a staggering 29 per cent!

So when all this blows, the shock front will spread far and wide—emphatically including London. About 42 per cent of all Spanish debt is held by foreigners: The public debt component is 38 per cent held abroad, and the financial sector’s debt is 80 per cent foreign owned. Of those foreign holdings, nearly 15 per cent are in London banks; only German and French banks are more exposed.

But that’s only part of the story. The “Spanish” banking system itself is, in large measure, a financial and political subsidiary of the City of London. The two largest commercial banks in Spain, Santander and BBVA, control 29 per cent and 27 per cent respectively of the entire banking system’s assets. Santander is run top-down by the Royal Family’s Royal Bank of Scotland, and BBVA also has historical ties into British finance.

As the fuse on the bomb burns down quickly, what would London have the Spanish government do about this mess? Further destroy the physical economy, and lay off millions of more workers in a country that already has the highest official unemployment rate in Europe, at 20 per cent. And that will make the country ungovernable, to put it mildly. [Source: LaRouchepac.com, 30^th May, 2010]

Note: Australia’s “Big Five” banks have similar dangerous levels of exposure to the property bubble as their counterparts in Spain. After 18 months of what The Age of 9th April called “gorging” on the mortgage market, fueled by Rudd’s First Home Owner Grant scheme, the Commonwealth Bank has a concentrated exposure to mortgages amounting to 65 per cent of its lending book, Westpac and St. George 62 per cent, ANZ and NAB more than 50 per cent. To finance their mortgage lending splurge, the banks have borrowed heavily from overseas, currently carrying foreign debt of over $860 billion, of which $440 billion is on 90-day terms.