Valencia’s dazzling City of Arts and Sciences, with its glazed domes, turquoise pools and cloistered pathways, was built by the regional government during Spain’s boom years of easy money and uncontrolled building.
Now the center, inaugurated in 1998, is a monument to a disastrous construction lending spree that has crippled Spain’s banks and threatens to undermine efforts to avoid insolvency.
The complex, encompassing an opera house, a planetarium and Europe’s biggest aquarium and partly financed by unlisted regional banks, or cajas, made losses of 51.2 million euros (US$70.5 million) last year, with debts of over 700 million euros at the end of December.
Unsustainable lending to private developers, government and individuals was the hallmark of Spain’s decade-long property boom, fueled by ultra-cheap interest rates after the country joined the eurozone in 1999.
Cajas were at the front line of the credit binge. These lenders were first set up hundreds of years ago to tide over farmers at times of poor harvest, but many began to be used by local politicians to fund pet projects and morphed from modest provincial lenders to real-estate speculators. In recent years, cajas made up about half the country’s banking system.
“Those that were well-run were very cautious and didn’t get their fingers burnt,” said Charles Powell, history professor at CEU-San Pablo University. “Others were outrageously generous.”
Caja de Ahorros del Mediterraneo (CAM), a 135-year-old Valencia-based savings bank, was one of the profligate ones, and was taken over in July by the government, who found much bigger losses than expected. It also found that CAM directors and their equivalents at fellow failed savings bank NovaCaixaGalicia had awarded themselves multimillion euro severance-pay packages while racking those losses up.
The reports shocked Spaniards suffering the highest unemployment amongst industrialized nations — one in five is out of work — and the threat of deep cuts in health and education.
Bank of Spain Governor Miguel Angel Fernandez Ordonez said in September that the behavior of the CAM executives “scandalous” and said the bank was “the worst of the worst.”
The mismanagement at the heart of the problem continues today, resulting in practices that have kept real-estate prices artificially high and masked the banks’ losses, market participants said.
After the property collapse, banks and cajas wrote off loans to bankrupt real-estate developers in return for taking on their portfolios of unsold properties, which allowed the lenders to avoid registering losses on their own balance sheets.
Now those banks, lumbered with huge real-estate assets, will not give mortgages unless the buyers buy the properties from the banks themselves. This has strangled the market and kept prices artificially high.
“Now the banks have got the property and the money and they only provide funding for their own properties,” real-estate agent Vicente Beltran said in his modern offices near the City of Arts complex. “This is throttling the real-estate market on all levels.”
The People’s Party, forecast to take power with a sweeping majority in this month’s elections, has said it will force banks to write down real-estate assets to restore credibility to the financial system.
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