Nightmare Before Christmas for Spanish Banks

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The European Court of Justice refused to listen.

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

The European Court of Justice just delivered a landmark ruling that could cost Spanish banks – or Spanish taxpayers, in case of another bailout – billions of euros: 40 out of Spain’s 42 banks will have to refund all the money they surreptitiously overcharged borrowers as a result of the so-called “mortgage floor-clauses” that were unleashed across the whole home mortgage sector in 2009.

These floor clauses set a minimum interest rate, typically of between 3% and 4.5%, for variable-rate mortgages, which are a very common mortgage in Spain, even if the Euribor dropped far below that figure. In other words, the mortgages were only really variable in one direction: upwards!

This, in and of itself, was not illegal. The problem is that most banks failed to properly inform their customers that the mortgage contract included such a clause. Those that did, often told their customers that the clause was an extreme precautionary measure and would almost certainly never be activated. After all, they argued, what are the chances of the Euribor ever dropping below 3.5% for any length of time?

At the time (early 2009), Europe’s benchmark rate was hovering around the 5% mark. Within a year it had crashed below 1% and is now languishing below zero. As a result, most Spanish banks were able to enjoy all the benefits of virtually free money while avoiding one of the biggest drawbacks: having to offer customers dirt-cheap interest rates on their variable-rate mortgages.

Following the latest ruling, the banks named in the suit must reimburse clients all the money they’ve surreptitiously overcharged them, and not just from May 2013, when Spain’s Supreme Court ruled that the floor clauses were “abusive” and “non-transparent,” but from 2009, when the banks began introducing the clauses.

In its original ruling from 2013, Spain’s Supreme Court argued against applying the law against floor clauses retroactively to 2009 on the grounds that it would potentially cripple the banks’ finances. The EU’s advocate general, Paolo Mengozzi, echoed that sentiment in July when he proposed putting Spain’s “macroeconomic considerations” (legalese for “what is best for the banks”) before the microeconomic needs of consumers.

But the European Court of Justice refused to listen, instead arguing that if a clause in a contract is declared void, it is so from its origin, with the result that the 40 Spanish banks implicated in the practice could end up owing their mortgage customers as much as €10 billion in refunds, according to the financial consultancy firm Analistas Financieros Internacionales. It could be even more.




The market’s initial response was emphatic, with Spanish banking stocks plunging by as much as 10% before rebounding. Banco Sabadell SA, which has so far refused to reimburse its affected mortgage customers and has allegedly done less than most other banks to provision its exposure, fell as much as 7.5%, while Banco Popular’s penny stock slipped by 10.5%, the largest decliner in Spain’s Ibex 35 benchmark. At the time of writing almost all Spanish bank stocks are down, though not as heavily as before. Banc Sabadell is down 2%, BBVA 1.9% and Popular, by far the most affected, 6.9%.

The timing could not have been worse, with Spanish banks already under concerted pressure from weak demand for credit and low interest rates. To make matters worse, some banks are still making provisions for bad loans, a dirty hangover from the insane exuberance of Spain’s real estate bubble. Which pressures their profits even more. They include Banco Popular, whose shares have crumbled over 70% this year and which urgently needs to dump a large part of its toxic baggage. But as The Wall Street Journal points out, that’s easier said than done:

Its real-estate assets are of such poor quality that it would have to divert revenue toward more provisions to cover loan losses. Alternatively, it could sell some property assets at a loss. Either way, profits would take a big hit.

Popular was already expected to announce total losses of at least €3.7 billion for this year as a result of billions of euros of provisions. And that’s assuming it’s given a green light to spin off €6 billion worth of dodgy assets into a separate investment vehicle, optimistically titled Sunrise, that will be floated on the stock exchange early next year. Now it will have to make even more provisions.

In the meantime, if it – or any other Spanish bank – wants to continue applying floor clauses in the future, it will have to do so in an open and transparent manner, which pretty much defeats the purpose, since if banks were completely up front about the inclusion of floor clauses in their contracts and what that actually means to the mortgage holder, no one in their right mind would accept them.

And that can mean only one thing: even tighter margins on the banks’ books. Clocking in at €521 billion, home loans are one of the largest parts of Spanish bank lending business. For 2016 alone, the disappearance of the floor clause is expected to set the banks back over €2 billion in margins, followed by a further €4 billion between 2017 and 2019. The banks have tried to make up for those losses by ratcheting up customer fees, but that is already beginning to provoke a an angry backlash, with even the government criticizing the banks’ actions.

As long as interest rates in Europe continue to remain artificially low – a phenomenon that is “killing” Europe’s banks, in the words of Francisco González, Executive Chairman of Spain’s number-two bank, BBVA – the balance sheets of Spain’s banks will continue to suffer. No doubt, the Spanish taxpayer will be on hand to fill any holes. By Don Quijones, Raging Bull-Shit.

Part of the huge pile of toxic loans on the books of Italian banks is often the result of corruption, political kickbacks, fraud, and abuse. Read…  Italy Banking Crisis is Also a Huge Crime Scene




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  30 comments for “Nightmare Before Christmas for Spanish Banks

  1. Gianfranco Mazzero
    Dec 21, 2016 at 1:08 pm

    The most important thing to take into account, apart from what is explained in this good article, is that the European Court of Justice has preeminence over the Spanish Court. Local contracts cease to have validity when there is a Higher Instance.

  2. Doug
    Dec 21, 2016 at 1:43 pm

    Heads I win tails you lose, Bankers logic and don’t even think about trying too change it as the world will collapse.

  3. Tom Kauser
    Dec 21, 2016 at 1:56 pm

    Robo-signers needed fast!

  4. Valuationguy
    Dec 21, 2016 at 1:59 pm

    Actually…this is a long awaited return to sanity by the Court system….actually applying legal precedence to contracts EVEN WHEN IT IS INCONVENIENT to the whim of gov’t.

    The Spanish Supreme Court knew the law back in 2013 based on the original ruling…but chose (based on political pressure and expedience) to ignore the inconvenient portions of it by trying to only make it applicable on a going forward basis….

    Congrats to variable interest mortgage holders in Spain….

    Of course this just means the gov’t and banks will be forced to take even more desperate measures…..but, in this instance at least…the LAW prevailed.

    • nhz
      Dec 21, 2016 at 2:40 pm

      IMHO this is a really bad decision: the mortgage holders got what they signed up for, nobody was banking on paying nothing for the mortgage due to NIRP policy.

      But the EU taxpayers (of course, not the banks) will get the bill for this idiot decision. This on top of the already EXTREMELY GENEROUS subsidy of Spanish mortgages by the ECB. Half of the country is paying next to nothing for their homes thanks to ultralow Euribor, courtisy of the ECB.

      a morally BANKrupt decision.

      • Al Tinfoil
        Dec 21, 2016 at 4:29 pm

        The moral bankruptcy here is that of the banks that sneaked in the “floor” clause and even lied outright to customers who noticed the clause and asked about it.
        The decision of the top European court is entirely correct and follows centuries of legal precedents – a void clause in a contract is void throughout the the entire contract term.
        This case highlights the insanity of NIRP – the desperate attempt to keep the leaking European financial system afloat by introducing negative interest rates. The NIRP idea (that a lender should pay a borrower interest on the money lent) is the antithesis of the idea that saved capital has value and should be rewarded with rent if it is lent out or deposited in a bank.

        ZIRP and NIRP were introduced in attempts to stimulate the moribund EU economies and to SAVE the banks from the effects of their insane lending binges. How ironic it is to see the banks now suffering from ZIRP and NIRP as their traditional everyday operations cannot turn a profit.

      • Jay
        Dec 22, 2016 at 2:46 am

        If mortgage holders get what they signed up for, you could make the same argument that the banks got what the banks signed up for. No one forced the banks to make so many dodgy loans, and they wouldn’t be in such dire straits or dinging your beloved “EU taxpayers” if the banks had kept their noses clean. Furthermore, I hardly think the “ultralow Euribor” is making homes in Spain cost “next to nothing.”

        • nhz
          Dec 22, 2016 at 4:49 am

          that’s a really lame excuse for screwing the EU taxpayers, who didn’t sign up for anything.

          many people in Spain, especially in newly build communities, have a variable rate mortgage of Euribor +0.5-0.75%. They really paid and pay next to nothing for their home (except for a brief period around 2005 or so when Euribor was in the 5% range).

      • A Dim View
        Dec 22, 2016 at 4:13 am

        Rubbish. I have a mortgage to one of these gangster banks in Spain & they withheld this information in the first instance & then lied about it in the second, saying it was a Spanish law and it was out of their hands.

        I spoke to my Spanish lawyer yesterday (a mid-size firm with offices across Spain) & they candidly told me that after the ruling was released lawyers were messaging each other saying “Happy New Year!” because of all the fees they’re expecting. Everyone knew the banks would lose, but in typical fashion the banks were expecting the courts to bail them out.

        So it’s a deserved win for the little guy and if some of these banks fail & if some countries find the Euro’s idiotic strictures too much to take, then they should nationalise their banks, leave the Euro & gain some sanity.

        • d
          Dec 22, 2016 at 10:23 am

          Talk to them about “Harm” after the recovery of interest issues.

          The banks have caused you hardship, stress, reduced lifestyle Etc etc all of which are “Harms” by their action’s.

          So not only are they liable to reimburse all your interest and compounded interest on that sum.

          They may be liable for additional Compensation/Damages, depending on said Spanish law’s.

          Financial constraint causes people to divorce, delay having or not have children. Not have holidays Etc etc.

          Smart lawyers can pull a fortune from this situation for their clients.

          Depending on the statutes.

      • Dec 22, 2016 at 9:54 am

        nhz, ECJ’s decision was contract law. It has nothing to do with you or European taxpayers. It has to do with Spanish banks who screwed their customers and got caught (faulty, insufficient, or no disclosure).

        The banks have to pay now. Still no European taxpayer involved. If the banks fail because of it, bank bondholders and stockholders should take the loss. And Spanish deposit insurance should cover depositors. Still no European taxpayers involved (outside Spain). But I doubt it will get that far. And the amounts won’t be big enough to require and EU-type bailout of Spain itself.

        I think you’re making connections that go too far.

        • Valuationguy
          Dec 22, 2016 at 11:24 am

          Given the true leverage in Spanish banks and the political paralysis there, I’m not as confident as you Wolf regarding the downstream results being confined to Spain (not EU) taxpayers. Investor confidence is nebulous by any ‘definition’…and avenues of transmission into the EU are many.

          The saving grace for the Spanish banks is that the accounting is sufficiently squishy to allow them to (massively) underreport their ultimate ‘fair’ liabilities until finalized by the Spanish courts.

        • Jon T.
          Dec 22, 2016 at 12:19 pm

          Wolf, Hans Werner Sinn recently wrote an article titled “Europe’s secret bailout “. I would not be surprised if we here in Holland would end up with part of the bill anyway. Maybe it will go around and renamed, politicians will probably tell us “No connection, completely different”, but my feeling too is part of the bill will end up here.

          Thanks Wolf and Don for all the writing, happy holidays!!

          https://www.project-syndicate.org/commentary/risky-eurozone-debt-buybacks-by-hans-werner-sinn-2016-11?referrer=/kVbFCEg3w4

        • nhz
          Dec 22, 2016 at 1:11 pm

          Wolf,

          you know just as well as I do that the whole Spanish banking system is basically bankrupt; they just haven’t admitted it yet. So without any doubt the Northern EU taxpayer is getting the bill, just not now but in the near future (just like EU taxpayers will pay most of the bill for today’s Italy bailout).

          I don’t have a problem with upholding contract law but there are limits and some people would profit immensely from this decision without deserving it.

          Do you also think that e.g. the multi-million dollar pensions of the Dallas police en fire department workers have to be upheld forever, even if it bankrupts the whole state? Contract is contract?? The workers will complain that nobody told them in fine print or large print that the entitlements in their contract are impossible to realize, so they have an iron case ;-(

        • nhz
          Dec 22, 2016 at 1:22 pm

          @valuationguy:
          yes, the Spanish banks are definitely still using funny accounting and one of the main issues is some of the homeowners we are talking about here.

          Many of the new Spanish housing developments are only affordable for their ‘homeowners’, and (mostly) above water for the banks, as long as Draghi keeps the Euribor rate near zero. Real estate is still the main backing of debt in Spanish banks. If rates go up to somewhat normal levels many current owners can no longer pay the mortgage, and valuations of the homes in an open market would crater. Most of the propertis that are still unoccupied years after the crisis should be valued close to zero. But thanks to Mario and his mobsters, the Spanish government and banks have zero reason to make changes and continue partying like they were used to. It’s all extend and pretend.

          Mario clearly aims at crashing the value of the euro to near zero, inflating away all the problems. That’s great for Spanish, Italian, Greek etc. debtors, but less great for savers and taxpayers in Northern Europe who see their capital evaporate and who are paying the real price for all these bad decisions (by banks, politicians and many private individuals).

        • d
          Dec 22, 2016 at 8:36 pm

          OT

          http://uk.reuters.com/article/uk-eurozone-banks-monte-dei-paschi-reque-idUKKBN14C02B?il=0

          But not.

          This thing is a orchestrated train wreck.

          I think they are trying to bury it in the holiday season just like http://uk.reuters.com/article/uk-israel-palestinians-un-ultimatum-idUKKBN14C02G?il=0 Back stabbing O BUMMER BS.

          The answer to that if it passes, will be annexation, and War.

          It will force Israel to clear Judea Samaria and the Jordan valley, the same way the muslim did in 1948.

          1 suitcase a no money, golds, silver, watches, or jewelry, and march at gun point.

          20/20 hindsight, it should have been done in 1967.

          It is not possible to make peace or live in peace, with people who deny your right to exist. At their church every Friday.

        • d
          Dec 22, 2016 at 9:03 pm
      • robt
        Dec 22, 2016 at 1:27 pm

        I am usually no friend of the Banks, but …
        The traditional spread on interest was usually about 3%, so even if bank access to funds was 0% – 1 1/2%, you would expect to pay 3% to 4.5%. Apparently also, even if the bank drew attention to the clause, they are held to the principle that they can tell the future on interest rates.
        This is nothing but buyer’s remorse and make-work for ambulance chasers, who presumably will get their 33% cut of the award.
        Compensating aggreived mortgagors should be an interesting exercise – calculating multiple periods of interest rate fluctuations and the ‘overcharge’ applicable to each period. Also to be considered is whether all the people who defaulted on their mortgages, thus causing the insolvency of the banks will get compensation for the period they were listed as the mortgagor.

        From the perspective of jurisdiction and sovereignty, I am usually concerned about the powers of the EU court over the individual states, but in this case a comparison could be made with the Federal Supreme Court in the States and State Supreme Court rulings. Typically if the plaintiff loses in a State, they appeal all the way to the Federal Supreme Court.

      • Maximus Minimus
        Dec 22, 2016 at 4:32 pm

        I agree with you on this one. What you are upset about is basically a broken system where responsibility have been thrown out the window.

        Keep it in mind when the system has a performance review. /sarc

  5. d
    Dec 21, 2016 at 5:44 pm

    Why was this forced all the way to the top at the Eu courts ..

    Law 101

    An illegal contract, is illegal, from the point of signing.

    Further an illegal contract is unenforceable.

    It may be possible to claim ( an even successfully argue) the bank’s have no right to foreclose on any properties with an illegal contracts.

    This. In my opinion. Was litigated to delay settlement, with the assistance of politicians and corrupt judges in Spain. That is illegal.

    Which is further grounds for damages actions against the politicos, banks, and judge’s involved, and possibly the state.

    The may be money to be made in forming an entity to peruse this, even though it will take decades

    The Spanish legal system is a mess l, If it was so important the people in this instance it would be a joke.

    • Chicken
      Dec 21, 2016 at 11:54 pm

      Bankers do whatever the heck they wan to do whether it’s illegal or not, with the expectation the assets will become their property and can sit empty and taxpayers cover the expenses if there are no buyers?

      • d
        Dec 22, 2016 at 12:13 am

        “Bankers do whatever the heck they wan to do whether it’s illegal or not,”

        Only when politicians let them.

        Corrupt politicians have walled themselves into a trap, to bring banking and the runaway credit, the politicians have got fat on, to heel.

        There must be financial pain, and the electorate dosent like that.

        Just like the NPL issues, the politicians will kick the can, until they cant.

        As NPL resolution will negatively effect the electorate, and so them.

        The current form of democracy is a disaster, the leftist will not allow to be fixed, without much resistance.

        As part of the cure, is to prevent the left buying the electorate, with long term financial unsustainable hand outs.

        • nhz
          Dec 22, 2016 at 1:35 pm

          at the moment it’s primarily the other way round in Europe. Politicians can do whatever pleases them because the ECB makes it possible with its ZIRP policy, even though Mario keeps mentioning that they need to start making painful adjustments (only for public consumption, IMHO).

          It’s one big party for politicians (government borrowing is cheaper than free, bread & circuses galore), debtors (owning a home is now 2-4x cheaper in Netherlands than renting a similar home), government workers and people on the dole (incomes increasing several percent above official inflation lately) etc. Even pensioners in Europe have been mostly spared (some smaller pension funds are not quite keeping up with inflation, but that’s about it) thanks to the funny accounting that the ECB enables. Although the day of reckoning is probably very near for many pensioners.

          The only ones who pay the bill up to now are savers (capital shrinking by 2-4% per year thanks to inflation, NIRP and wealth taxes) and small business (impossible to compete with the big ones that get free money). Ultimately the taxpayers will get a huge bill as well, because government debt will become unsustainable when rates revert, and at some point the Target2 balances will come due and bankrupt most of the EU countries that thought they still had a nice piggy bank. And that’s without even taking into the account what happens to mortgage debt when rates really rise, there too the debtors will pay very little because many make sure there is nothing to collect form them – it will be others who pay the bill for years of reckless speculation and overspending.

        • d
          Dec 22, 2016 at 8:15 pm

          Trace the party back to the beginning.

          Dodgy Euro bankers had an NPL issue that they did not want to resolve, as it would negatively impact profits.

          POLITICIANS AND CB’S Let the banks do that.

          And do that, more, and more, so now they cant stop them.

          Zombie company’s, Housing bubble, Etc, Etc,

          The whole mess comes back to the original can kick, on NPL’S.

          Dont look for and resolve the result of the problem (which is what parts re-placers milking consumers do) them continue making profits.

          Look for, and resolve the cause of the problem. Then it will not come back.

          Remember 1929 in the US was a US event. The collapse of a Euro Bank, made it a global event.

          Just as greece made the US 08 event, a global one.

          The Club-med dominated EU put a Club-med mobster in the ECB. to protect the Club-med banks.

          The Club med Bank issues will not be resolved until after he goes.

          Resolve the Club-med banking problems without German taxpayers money or loose the Euro. And probably break up the Eu, Simple.

        • nhz
          Dec 23, 2016 at 5:07 am

          @d:
          “POLITICIANS AND CB’S Let the banks do that.

          And do that, more, and more, so now they cant stop them.”

          Yes, I agree. I didn’t want to clear the EU politicians of any responsibility, I was only pointing out the current situation. Voters are a bit responsible as well, if only because they demand bread and circuses which they should know cannot continue. But most down-votes of new EU and ECB proposals have been ignored by the establishment, so it is difficult to really blame the voters for this mess.

          Either the ECB bankers or EU politicians can stop this if they want, but both parties want to kick the can and profit along the way as long as the fun lasts; which makes sure that the final reckoning will be much worse :-(

  6. nick kelly
    Dec 21, 2016 at 6:23 pm

    Re: value of assets.
    I don’t know but wonder if it would have been better to mark the real estate to market years ago AND offer the much lower mortgage rates to both new buyers and existing ones.
    By holding lower rates off the mortgage market it would seem likely that this depressed the real estate market.

  7. Chicken
    Dec 21, 2016 at 11:49 pm

    I think they’re waiting for the euro to reach Zimbabwe status before repaying those non performing loans? Wonder if there’s probably a lot of unoccupied real estate still sitting on US bank books as well?

    • nhz
      Dec 22, 2016 at 1:45 pm

      that’s definitely the plan of the average EU homeowner .. paying off the mortgage with the change from the grocery shop. Even some well-educated, well-paid people I know openly admit as much.

      Let Mario do his magic tricks! Times are great for speculators and those who made just stupid decisions and purchased far more home (or car etc.) than they could afford in a normal market economy. When rates finally go up one can count on all these homeowners suing the banks (= the taxpayer) because they were “duped” and were sold a home that was really too expensive for them; just like they were “brilliant” and had a party lasting for years thanks to buying the maximum home they could get a mortgage for.

  8. Chicken
    Dec 22, 2016 at 12:10 am

    Sunrise is perhaps the wrong name, it’s a one-way street when it comes to the elite classes.

  9. Tom kauser
    Dec 22, 2016 at 12:54 pm

    Disconnect in MBS
    I got BINGO
    Deflationary

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