Caja’s are Spain’s Building Societies. They are where the boom was and where the bust is. They are unexploded ordinance.
Problems first surfaced in the Cajas back in July of 09 when Caja Castilla La Mancha folded and was rescued. At the time people suddenly noticed non-performing loans at the Caja were 4% and set to grow to 6%. Everyone said more will follow this year. None did. A miracle.
No one was encouraged to ask why. The Spanish Central Bank and Government were happy to keep the lid firmly screwed down on the mess inside, for as long as possbile. It now seems time might be up.
So what is the mess, why did it not blow up before and why might it do so now? Here is my guess. Take it for what it is – an eduated guess, no more.
Caja’s used to be restricted to operate locally. Some years ago the geographic restriction was lifted. Caja’s grew. So did their ambitions and lending. Sadly their expertese was not up-graded. Please – this is not some veiled anti Spanish rant. Take a look at our banking geniuses and don’t feel picked on. You have yours, we have ours. I’m just talking about yours today.
Because Caja’s used to be purely local and therefore were staffed locally, they were often – shall we say – amateur and ‘local’ (think – Royston Vasey). Headed by local notables and powerful friends, they were quite often the same group of people who ran local politics. Anyone familiar with Spain will know that the Major and his friends, and the local Caja are often, if not the same people, then from a small group.
Caja’s were massively involved with lending to developers and property buyers and builders. In part this is because they were ‘close’ to the people who decided on permissions to build, who could change land designation from agricultural to urban development.
At first this arrangement mean permits, funding and land were all quickly put together and a boom constrcuted. Of course, as everywhere, greed showed up and the cosy arangement incubated the greed. Local – now ambitious to grow – Caja were ready to loan to anyone who had a few connections. Local politicians could make a killing by getting the permissions in line and developers – well they did what they do everywhere. They made eveyone rich.
When the first Caja went under you have to ask why nothing lese appeared. Nonthing at all. Chronic unemployemnt reaching 20% and staying there – yet not a peep. No wave of foreclosures. no mention of bad debts or non-performing loans, not one Caja in trouble.
Surely, you would think, with falling deposits, and defaulting loans from bankrupt developers (an army of them DID go bust and default) not to mention 20% unemployed who you might have thought would find the mortgage difficult – but no. If any of this was happening it was sealed off inside the Caja and the Caja themselves didn’t break a sweat.
Why?
They didn’t have to go to the bond market to ask for loans that’s why. If they had had to, their books might have fluttered open and an almighty stench would have wafted out. The Cajas only had to deal with the Central Bank of Spain. The CB stood behind the Caja and made their credit worthiness impeccable. But what happens to that arrangement when the Central bank starts to have trouble? Oops!
That is where we are now. I think we might well find that the losses and non-performing loans were there all along but are only now goint o ooze out intpothe light. If I’m right you will see large losses appear in the new larger combined Caja. Losses that will require the Spanish CB to suddenly have to inject large amounts in the new Caja.
If this is correct we will see the Sanish CB having to sell more debt – which could be a problem because at the last auction half their bond buyers were their own banks and Caja’s – double Oops. I wonder if the ECB will have to step into this one.
If so that should do wonders for the value of the Euro. Part of me wonders if the market hasn’t already begun to catch a whiff of this sort of local stench, and is part of the Euros’ continuing loss of value.
The Spanish were keen to tell the world how they had regulated their banks so that they had avoided the US Sub-prime killing field. What they did not say was they had their own Sub-Prime. For two years I think they have quarantined it in the Caja but now it is leaking out.