Spanish Banks Brace for Ultimate Showdown

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“Very serious threat … to Spain’s entire mortgage market”: Moody’s

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

A bitter, long-simmering conflict finally appears to be reaching its finale in Spain. On one side of the divide are the country’s biggest banks and some of the world’s largest investment funds; on the other are hundreds of thousands of families who lost their homes after the collapse of one of Europe’s biggest ever housing bubbles, together with the many thousands more who face the same fate today or tomorrow.

In Spain, more than in most places, debt stays with you until death do you part; it is never forgiven nor forgotten, and mortgages are “full recourse.” Even when a bank, often with the heavy-handed assistance of the forces of law and order, has repossessed someone’s home, that person could still be left on the hook for thousands, if not hundreds of thousands, of euros of debt.

Most Spanish foreclosure victims end up personally liable for not only much of the outstanding loan, but also thousands of euros in penalty interest charges and tens of thousands of euros in court fees. They can end up owing more than the original mortgage, but with no house to speak of, or live in.

So contentious is the issue of foreclosures in Spain that it sparked a nationwide resistance movement. When a local resident is threatened with eviction, word quickly spreads and groups of neighbors and social activists begin forming and offering their support. By the time police officers arrive there is an almost impenetrable wall of protesters between them and the front door of the property to be foreclosed.

The Rajoy government’s response to this popular movement was to include within its Orwellian-dubbed Citizen Security Law (A.k.a the Gag Law) a clause that made it illegal for people to try to prevent, through passive, non-violent resistance, the forced eviction of a local resident. If found guilty, suspects could face crippling fines of up to €30,000.

Now, the European Commission, for once seemingly on the side of the common man, has launched a formal legal procedure against Spain for failing to protect consumers against the abusive clauses that proliferate in Spanish mortgage contracts. It also demands that Spanish law finally gets in line with European directives on mortgage contracts and payment orders, which date back to the year 1993.

During the immediate aftermath of the multi-billion-euro bailout of Spanish banks, in 2012, the Commission published a number of scathing reports on Spain’s dysfunctional foreclosure laws. The problem, as the same reports pointed out, was that changing the laws would risk doing untold damage to the already deeply compromised balance sheets of the banks. The Commission decided to err on the side of caution.

Now, four years and over 600,000 evictions later, the balance sheets of Spain’s banks are apparently fortified enough to withstand an overhaul of Spain’s foreclosure laws. At least that’s what the Commission seems to believe. Judging by the disappointing quarterly results announced this week by most of Spain’s biggest banks, senior management may beg to differ.

On Thursday, Spain’s second biggest bank and one-time systemically important financial institution, BBVA, announced first-quarter profits of €709 million, down 54% from the same period last year. In response to the news, its shares nose-dived over 6.5% on Thursday and 4.7% on Friday. The bank blamed its poor performance on a heady cocktail of factors, including currency market volatility, in particular in key emerging markets like Mexico, Brazil and Turkey, increased operating costs, lower revenues from its brokerage activities, and a permanently stagnant real estate sector in Spain.

Now, to cap it off, the European Commission is calling for a complete overhaul of Spain’s foreclosure laws, which would almost certainly make it more difficult for the banks to speedily foreclose on delinquent owners, in turn hampering their ability to securitize and offload real estate assets on to international funds, such as Goldman Sachs and BlackRock. These express foreclosures have been an essential source of liquidity in recent years.

If the European Commission remains unimpressed with Spain’s caretaker government’s minimal efforts to address abusive practices in the sector, it could refer the case to the European Court of Justice. If the court then rules in favor of Spain’s mortgage victims, the government could end up facing punitive fines.

The fact that on Friday the Rajoy government announced that it seeks to block crucial aspects of the Catalan regional government’s broadly popular anti-eviction law, which is aimed at reducing evictions in the north-eastern region, as well as expanding the stock of properties available for social housing, is hardly reassuring. Nor is the revelation from the news website Voz Populi that the government was bowing to direct pressure from large Spanish banks and some of the world’s biggest investment funds. They include BBVA, which has spent months trying to sell a €1.5 billion mortgage portfolio.

As the U.S. rating agency Moody’s warned in February, the Catalan anti-eviction law includes a clause that states that if a bank sells a mortgage to a third party, such as, say, an investment firm on the other side of the planet, just as BBVA hopes to do, the debtor can be released from the credit arrangement. It’s primarily for this reason that the new law poses, in Moody’s words, a “very serious threat,” not only to real estate investment in Catalonia, “but to Spain’s entire mortgage market.”

It’s also probably the reason why BBVA has put the skids on its international sales campaign — temporarily!

In the meantime, the stage is set for the ultimate showdown between Spain’s foreclosure victims and Spain’s major banks. It bears all the hallmarks of a classic David versus Goliath contest, with one important twist: on David’s side is one of Europe’s most powerful institutions. The perverse irony is that if Spain’s government successfully blocks Catalonia’s anti-eviction law, on the flimsy pretext that it discriminates against other Spaniards, and the Commission ends up fining Spain for its failure to tackle the financial sector’s abusive practices, it will be Spanish taxpayers who will, once again, pick up the tab. By Don Quijones, Raging Bull-Shit

Since the housing bubble popped in Spain, unleashing one of the deepest recessions in memory, the nation’s public debt has more than doubled, to nearly 100% of GDP. Last year, despite the fact that Spain grew faster than almost any other European economy, the government racked up a deficit of 5.2% of GDP, the third-highest in the Eurozone after Greece and Portugal. And now, as the EU scoots closer to the verge: Read…  With Impeccable Timing, ‘Economic Miracle’ in Spain Unravels

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  34 comments for “Spanish Banks Brace for Ultimate Showdown

  1. April 30, 2016 at 12:45 pm

    It is the prioritization of property rights over human rights that will bring down current neo-liberal capitalist epoch [by its own hand]. The idea is to shear the sheep — not flay them…

    • Petunia
      April 30, 2016 at 12:58 pm

      Yep, you can see it coming too. The same people that supported Occupy Wall Street are protesting Trump in California and it is turning violent. Once the protest movement spreads it won’t just stay in America. I use to wonder how the French Revolution, or even Hitler, got started. I don’t wonder anymore.

      • Curious Cat
        April 30, 2016 at 3:42 pm

        I think Occupy Wall Street lacked only two things to be a “successful”, Influential and probably very disruptive movement. It lacked a cohesive, well articulated vision and it lacked a charismatic leader. With those two additions it may have reached the tipping point for social change. The Tea Party was almost there, and the Trump supporters are almost there, but they have no articulated goals. The Tea Party and Trump supporters will not start a social revolution of significant change because revolutions are brought about by young people with energy and purpose, not old people who are trying to return to a past that never existed in the first place.

        • walter map
          April 30, 2016 at 4:31 pm

          “The Tea Party was almost there, and the Trump supporters are almost there”

          Radical right-wing extremists, being tools of corporatist totalitarians, do not militate for progressive social change. And it is not possible for you to be unaware of that.

        • d'Cynic
          April 30, 2016 at 11:34 pm

          Let me formulate another theory of revolution; that of a series of seemingly minor missteps/overreactions from which there is no going back to an old social contract. Of course, there are preconditions to a revolution: the major one is the mass realization that you need one.
          Let me arbitrarily describe the steps that led to the French revolution, and indulge me, I am not a historian.
          1. The country is bankrupted by wars, the treasury is empty and the king needs to levy new taxes (This was before the time that he could print money out of thin air). He convenes the national assembly of the three main states: clergy, nobility, and the third state.
          2. No sooner does the assembly convene, that it becomes clear that the king is going to get more that what he narrowly bargained for. The thing is, he was so out of touch with the rest of society that he had no idea what was brewing down there.
          3. He calls the army to Paris to dissolve the national assembly.
          4. The population gets the wind of it, attacks the Bastille, and in the heat of it, beheads the commander of the fortress.
          At that point, the battle lines are drawn and there is no going back.

    • nick kelly
      April 30, 2016 at 8:33 pm

      The right to own property is a key human right. The strength of property rights is a metric used by all systems that attempt to measure freedom.
      It was completely absent from the Soviet Union and Maoist China, not exactly beacons of freedom.
      One of the most striking proofs/ examples of this is a famous photo. I can’t remember of which building, somewhere in downtown (New York?) where a high rise hotel or something has a strange facade. In the middle of the building, set right into it, right out front, is a very modest home, almost a shack.
      The developer assembled the site but for whatever reason could not acquire this little postage stamp lot. I suspect that the owner tried to shake down the developer a bit too far but who knows maybe they just liked it there.
      Ownership of property is one of the few areas where the little guy can confront the big guy(s)
      The above situation would never happen in Russia.

      • April 30, 2016 at 9:51 pm

        You need to re-calibrate. Google Kelo v New London to see what property rights the little guy now has.

        • nick kelly
          May 1, 2016 at 1:51 am

          I realize the little guy will always be at a disadvantage- my point is he has a chance. In most places outside of the West, he has none.

      • April 30, 2016 at 10:01 pm

        That sounds like Tokyo. I’ve seen it many times there.

      • Dan Romig
        May 1, 2016 at 6:06 am

        From James Madison, “Where an excess of power prevails, property of no sort is duly respected. No man (or woman) is safe in opinions, his person, his faculties, or his possessions.”

        From Sam Adams, “Among the natural rights of the Colonists are these: first, a right to life, second, to liberty, and thirdly, to property; together with the right to defend them in the best manner they can.”

        In the case of Spain, the question is of property rights is not so cut and drawn. The mortgage banks were predatory and deceitful, but the borrowing home owners entered into a contract that gave the banks ownership of the property until the note was paid off. One question to be asked is are the mortgage contracts legal?

        Spanish bankruptcy laws are Draconian to say the least.

      • Robert
        May 2, 2016 at 9:15 am

        Eminent domain is the bane of property rights, and has been the dominant principle for years, despite rare exceptions such as you cited. It was a Supreme Court justice from no less than the “Live Free or Die” state who helped put the nail in the coffin in creating a majority decision in which a little old lady was turfed from her property in favor of a parking lot which was never built, though her home was demolished.)

    • May 1, 2016 at 10:40 am

      Welcome to new version of democratic socialism – printing/corporate welfare is for everyone – but only for those who we will pick. Free speech is also for everyone unless you disagree with what is happening. Everyone is earning their share in this crony capitalism unless they are banks and big corporations – this is what happens in Spain. Blaming the failures of bureaucratic, crony semi-socialist, heavily indebted system on the voluntary exchange (free market capitalism) has no valid logic in it.

      • May 1, 2016 at 2:44 pm

        RE: Blaming the failures of bureaucratic, crony semi-socialist, heavily indebted system on the voluntary exchange (free market capitalism) has no valid logic in it.

        Indeed it does not, but in an expansion of Gresham’s Law, “Bad capitalism crowds out good capitalism.” It is obfuscation to call the current dominant socioeconomic system “free market capitalism,” when one of the most basic factors, i. e. the cost of capital is set by fiat, and the too big to fail institutions proliferate. What is committing suicide is not [mostly] free market capitalism, but a capo/casino/crony “thing” that has hijacked the name capitalism.

  2. Jerry
    April 30, 2016 at 3:14 pm

    This is not going to end well.
    History tells us that the state will always turn on its own people. If you go way back to Roman times which is very similar to our current situation where Rome had a large standing army and the state had made many promises which were unfunded of course. Now it is pay day, they have painted themselves into a corner and there is no way out, except for the pain. When ordinary folks start losing everything they have worked for they will end up on the streets.
    Face it folks, every western nation is broke. Historically when nation are in debt to the level of 100% of GDP they default. I call central bankers today, plate spinners because that is all they are doing. Sooner or later this is going to collapse like when you set off the first domino. Don’t take my word for it, read history, this is text book.
    The choices are very clear, civil unrest or war; the choice is yours.

  3. Christoph Weise
    April 30, 2016 at 3:16 pm

    It is not that Spain despite it grew faster than other European countries racked up a deficit of 5.2% but it grew faster than other European countries because it received EU-permisson to rack-up a deficit if 5,2% in one year. If the EU commission should grant the permission to Greece to rack-up a deficit of 5,2% in one year Greece will be the fastest growing country in Europe. This simple dependence of growth on accelerated indebtedness should be meanwhile well-known.

    • walter map
      April 30, 2016 at 4:42 pm

      It should be obvious to anybody that debt does not generate “economic growth” if the result is economic destruction, regardless of how GDP statistics are exploited to make it look that way.

      Any country can triple its GDP overnight by borrowing enough trillions. Then it’s bankrupt. So much for GDP.

    • MC
      May 1, 2016 at 12:29 am

      It’s well know permission was granted to allow the Rajoy Government to “buy its way” to an election victory.
      It didn’t happen: all Rajoy could buy was a stalemated election, with a new one coming in a couple of months, which promises to change little.

      That new debt did little or nothing for Spain’s unemployed: in a way it was yet another jobless recovery, like the ones Portugal and Italy have been “enjoying” for a while now.
      Local governments are very careful to shout to the world their success stories down to the second or third decimal, but are also very careful to hide away unemployment statistics. Or cook them: the new Socialist government in Portugal ordered the statistics department to review unemployment data upon being sworn in and found they had been “underestimated” by their predecessors.

      The general idea between larger deficits to cook GDP figures for a little while is wealth will “trickle down”, an assumption disproven by seven years of deficit spending throughout the EMU which did little for unemployment and nothing to boost wages. Failing everything else, it’s assumed people will feel more optimistic about the future and just go out and spend one way or the other.
      The only thing this policy achieved, in conjunction with Mario “Kamikaze” Draghi’s monetary policies, is inflating yet another automotive bubble. Car loans in Europe, especially in the South, are going through the roof again, in spite of declining real wages which make servicing those debts harder.
      But cars are not wealth. They are consumer goods, not capital ones: they lose value the second a license plate is riveted to them and do not produce wealth.
      To quote Richard Nixon “This is the last gasp”.

      • May 1, 2016 at 2:24 pm

        While the electorate is passive, indeed too passive, at some point they expect results, and the grandiose promises to be at least partially fulfilled.

        It has been at least a generation since the promises of prosperity and full employment were made to entice the electorate into supporting “trickle-down” economics based on neo-conservative [neo-liberal outside the US] models, and none of these has ever delivered from Kansas in the US, to Argentina in Latin America, and Ireland, Italy, and Spain in Europe.

        It is now empirically and pragmatically evident these socioeconomic models, and the policies derived from these models, are not functional in the “brave new world order” of supranational corporations, and the electorate is demanding something different.

        What that something else will be is unknown, nor how it is to be implemented/imposed. Let us hope it is both rational and humane, and not a return to even more obsolete dogma.

        • Agnes
          May 1, 2016 at 6:42 pm

          cough cough *Iceland*…..

        • May 1, 2016 at 8:28 pm


          Shows that violence is not necessary to “throw the bums out,” although a educated, motivated and reasonably homogeneous electorate does seem to be required. Concentration of the population in Reykjavik allowing for rapid dissemination of information and assembly of demonstrators also appears to have been critical, as posited by John William Cooke.

          FWIW: From the media reports, the only country currently making a concentrated and organized effort to keep their electorate informed of the actions, intentions and performance of the [new reactionary neo-liberal] government is Argentina, where intensive efforts are being made by the opposition parties/organizations and their spokespeople. The individuals include the former President Dr. Cristina Fernandez, the former Finance Minister Dr. Kiciloff, and the former Presidential Chief of Staff Anibal Fernandez. All seem to be doing an exceptional job and are speaking to large crowds. Note that this is *AFTER* the election.

          While in Spanish, some web sites of interest are [google browser will translate if you right click]

  4. KFritz
    April 30, 2016 at 5:46 pm

    Spanish mortgages closely resemble American ‘higher education’ loans, most of which can’t be discharged through bankruptcy. Scummy minds think alike, no matter the location.

    • April 30, 2016 at 7:56 pm

      Yes, but in the US, lenders can’t foreclose on your education. It’s yours to keep, whether or not it has any value.

      • d
        May 1, 2016 at 3:35 am

        Spaniards have EU passports.

        Why would a Spaniard, saddled with no home, or good job prospects, and a large debt, from a predatory lender. That will follow them around fro the rest of their lives. stay in Spain???

        Simply Leave Spain and the EU for ,north Africa, the Balkans, or Israel. After ticking leaving permanently on the departure questionnaires.

        Then return to the EU via the East. Get a German, Dutch, Austrian, ( Heaven forbid English) Drivers license. And a job/Life outside Spain where there is one.

        Has to be better than working for a predatory bank in Spain for the rest of your life.


        Full recourse loans are predatory, as nobody can accurately predict the future, much of the time..

        • May 1, 2016 at 8:47 am

          BTW, most states in the US have full-recourse mortgages (38?). But we also have a personal bankruptcy law that allows people to get their debts discharged. Hence, most banks don’t even go after the individual if they can’t pay their mortgage since they don’t have any money and would just declare bankruptcy and get the mortgage debt discharged. They foreclose on the home and leave the individual alone.

          Non-recourse mortgages are OK if they’re backed by a solid personal bankruptcy law.

          However, wealthy people in a full-recourse state are at risk and the bank may go after them.

  5. nick kelly
    April 30, 2016 at 8:16 pm

    As some have noticed I tend to be on the (economic) right but I am shocked to hear that a person can still owe for their mortgage after losing the property to foreclosure. In the past in OLDE English law this was the case but not usually now. In the case of a wealthy person who chooses to let a property go or a solvent company maybe its different.

    In Alberta, Canada, however we had a situation that may have leaned in the other direction. This goes back to the early 80’s crash. In the rest of Canada, if someone assumed your mortgage you were still liable for it. (Something a lot of people didn’t know because they weren’t told)
    This was a boring trivial detail while the market rose- but in the crash, people who thought that house was out of their lives were suddenly being served with papers.
    Not so in Alberta. If a guy assumed your mortgage you were completely off the hook. (there may have been a waiting period- six months)
    So- enter the ‘dollar dealers’. These ‘folks’ would buy your underwater house for a dollar, often making you pay the legals, and never make a payment. They would rent it out and keep the rent.
    They could often squeeze a year out of it because the system was clogged, and the courts treated the ‘buyer’ in the traditional way- he had
    six months to redeem, make good.
    I think this has been changed but not before it bankrupted Canada’s private insurer of mortgages leaving only CMHC in the biz.

  6. John Doyle
    April 30, 2016 at 8:58 pm

    In the not too distant future the deflation we see beginning now [ a la Harry Dent’s forecast] will overwhelm the banks’ abilities to take action against defaulting borrowers.
    Once a mass default gets going the banks will find no one will take up the vacated houses, unless paying pennies, so they will be left with little option but to let the borrowers stay, or see the vacant houses vandalised and made worthless.
    I think Detroit set such a scene already except when the city centre was abandoned and everyone who could moved to the suburbs an option not available this time.

    • April 30, 2016 at 9:57 pm

      OK, so here is solution … happening in Detroit:

      The city center got so cheap that a lot of Bay Area developers (people who write code not build buildings) fled from the high prices here and moved there, buying huge former office and industrial spaces for very small amounts of money and converting them to cool housing. And now part of Detroit downtown has revitalized with high-tech gurus and the coffee shops and stores that go along with them.

      That’s how you solve that kind of problem. Banks and bondholders take their losses – they already got paid (via interest payments and coupon payments over the years) to take these losses. When it gets cheap enough, and if it’s good enough, there will be a market for it. And life goes on in new and improved form.

      Some of the collapsed houses in vacated neighborhoods might never find a buyer, even for $1, given the liabilities associated with them. So tear them down. The losses have been eaten long ago. And let Detroit re-grow from the center out.

  7. Paulo
    April 30, 2016 at 10:27 pm

    My Nephew lives in Detroit. The city has been rebuilding from the ashes. Yes, there are razed no-go zones, but it is improving. Perhaps what they have done, and are doing, will serve as an example for many other cities as this unfolds.

    As for the article on Spanish banking laws, I cannot believe this situation has not turned violent and ended up with the death of many bankers. I know if someone took my home I would not go quietly. I cannot even imagine what those people are going through.

    Petunia nailed it. We now know how the crazy dictators get started. Anything would be an improvement. My Folks had friends from Germany. While both my parents fought against Hitler in WW2, (Dad US army major, mom canadian army nurse), they would get together with their German friends about once per month and talk about the war years. The common refrain from them was, “When Hitler first took over everything got better. We had food, jobs, and money. It wasn’t until the end of the war loomed that it all fell apart. But until then, he was wonderful”. Hard to believe, but there it is.

    If Govt., any goverment allows people to lose it all they do so at their own peril. It will only be a matter of time until that institution falls.

    I always felt it was interesting that these two couples became fast friends, despite their past history of conflict. People can prevail.


  8. Debravity
    May 1, 2016 at 4:48 am

    Dear Don or Wolf, should the Spanish arm of Santander become insolvent or very weakened, what are the chances (if any) that the British retail arm of Samtander could become affected and a risk for depositors or mortgagees?
    Thanks for all.

    • May 1, 2016 at 8:41 am

      The bank will always be bailed out, though stockholders and bondholders will likely be partially or fully “bailed in,” as they should be.

      Also, depositors have deposit insurance. So the risk for depositors who keep their balances under the limits of deposit insurance are small. Mortgagees have no risk if they keep making their payments.

    • Don Quijones
      May 1, 2016 at 12:18 pm


      If Santander was declared insolvent, the contagion effect would extend far beyond its British retail arm. That’s why it’s officially a global systemically important institution — i.e., Too Big To Fail — meaning it would almost certainly be bailed out, assuming of course it can be.

      • May 1, 2016 at 3:03 pm

        Even the largest container ship has some finite load limit. While the ship can indeed be loaded far beyond the Plimsoll line without sinking in calm seas, the first significant storm is likely to sink it, taking its cargo and crew to the bottom. The global, indeed all economies, are like this, in that a few too big to fail organizations can be indefinitely supported, but a point is quickly reached where even a moderately severe squall will quickly sink the overloaded ship/economy, which would have emerged unscathed is the load limits had been observed.

        Even more problematical is the “black swan” perfect storm, for example a severe prolonged drought, earthquake, pandemic, and credit crisis/event occurring at the same time.

  9. nhz
    May 1, 2016 at 12:19 pm

    “… which would almost certainly make it more difficult for the banks to speedily foreclose on delinquent owners, in turn hampering their ability to securitize and offload real estate assets on to international funds, such as Goldman Sachs and BlackRock. ”

    I don’t think it is a problem, there is lots of interest from international investors for Dutch real estate while the Netherlands has the most crazy mortgage laws and regulations of Europe. Investors are interested because they know that whatever happens, politics will make sure that the taxpayer (and not the homeowners themselves) will be stiffed. The Spanish situation is sad (people loosing their home and everything else but still on the hook for a large amount of money) but the reverse is also crazy.

    In my country over a million homeowners are living in homes that are “under water” while making payments that are sometimes several times lower than what renting such a property costs. So they have some kind of perpetual ultra-low rent. If they ever decide they want to move they have a special mortgage protection (as long as the mortgage is below a certain value, like about 275K now) that makes sure they can NEVER lose money on selling the home, all guaranteed by the taxpayers. In other situations the government pays the mortgage for wealthy homeowners who “have trouble paying the mortgage” because those 4 vacations per year, all those expensive hobbies and clubs for the kids, the second car etc. have priority over paying the mortgage, and you can’t take that away from people can you? Even if people lose the home, they can keep all their money in the banks, fancy car etc. and within 3 years of defaulting on a mortgage, they can ‘buy’ another home with a 105% or so mortgage and proceed with the next round of the housing ladder game. Heads I (the ‘homeowner’) win, tails you (the taxpayer) lose.

    At the same time Dutch banks are punishing savers to make sure that the mortgage rates are lower than ever, creating a bonanza for homeowners with a big mortgage. If the ECB and all the crazy e-con-omists have their way things will get even more ridiculous very soon (banks paying people to buy bigger homes and get even bigger mortgages – while punishing savers and renters even more).

    And let’s be honest: in Spain too many people purchased homes they would NEVER have been able to afford in normal economic conditions, with variable rate mortgages based on Euribor + 0.5% which is about nothing (again) nowadays. Do these people have the right to stay in these homes forever at ultra-low cost, as many people in Spain think nowadays? I don’t think so …

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