Crisis in Spain

Because of the dramatic increase in construction of new homes and the long time between the beginning and end of a construction project, by the time the demand for housing had slowed in 2007, available housing was just reaching its peak. By this time, construction accounted for 13 percent of total employment in Spain. When prices began falling and housing demand halted, unemployment jumped up 10 percent.

As unemployment skyrocketed, so did unemployment benefits. In a welfare state like Spain, unemployment benefits are generous. However, what was a sustainable unemployment level quickly became a drain on the Spanish government. The reduction in the Spanish government’s tax revenue, which is heavily dependent on real estate, exacerbated the problem. These drains on the economy turned a previous budget surplus of over 2 percent of GDP into a deficit of almost 4 percent of GDP, violating the limits of the Pact.

Spanish regional savings and loan banks, called cajas, account for half of Spain’s banking system. There are around 24,000 branches of cajas throughout Spain to serve its 46 million residents (one branch for approximately every 1,900 people). The United Kingdom, in comparison, with a population of around 62 million, has only 10,000 total bank branches (one branch for every 6,200 people). Cajas are not publically traded, and usually regional politicians control the cajas instead of shareholders. The majority of cajas’ clients are families, small and medium-sized business, and non-governmental organizations such as health care facilities, environmental groups, and cultural groups. Before the crisis, cajas often loaned to those that the larger banks turned away because they were considered “undesirable”—clients that were less likely to pay back their loans. Unlike the rest of the banking system, cajas were relatively unregulated, and they were not required to disclose certain information such as collateral on loans, repayment history, and loan-to-value ratios. This nondisclosure prevented the Spanish government from understanding cajas’ financial situations before and during most of the crisis. The government was also unaware of the depth of cajas’ investment in the real estate market.

When Spain’s two largest banks, Santander and BBVA, slowed lending in 2007, the cajas continued to lend heavily into the cooling housing market. By 2009, cajas owned 56 percent of the country’s mortgages, and loan payments from property developers accounted for one-fifth of the cajas’ assets. Because the cajas were not required to disclose much of their investment information to the government, their continued lending to the real estate market went relatively unchecked.