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Spain’s property market
Wobbly foundations
Mar 8th 2012, 16:45 by F.B. and J.R. | MADRID
“IF SOMEBODY wants to pay, the bank is going to try to help them,” beams the fresh-faced
manager of a big lender’s branch in Rio Rosas, an upmarket neighbourhood of Madrid. His
branch is a busy place, even though it extended not one mortgage last year. A big part of its
business now is focused on cutting non-performing loans (NPLs), loans on which customers
have fallen three months or more into arrears. Banks hate these not just because they want
their money back. Once a loan is classified as non-performing, the bank is obliged to set
aside provisions against it. If too many pile up then investors and creditors get antsy.
Spanish banks have already had to set aside billions to cover losses on €323 billion of loans
made to property developers; in February they were told by their regulator to set aside even
more. But a growing worry is that the rot may spread to entirely different categories of loans,
such as mortgages, personal loans and those made to small businesses. Until now banks have
set aside almost nothing to cover potential losses on these assets.
Indeed, NPLs on Spain’s €613 billion of mortgages are lower now than they were in 2009, at
around 2.6%, despite the fact that unemployment has since soared. “That is impossible, in our
opinion, given the current economic environment, even considering the decline in interest
rates,” says Santiago Lopez-Diaz, an analyst at Exane BNP Paribas. Because these loans
books are so large even small increases in bad debts are painful. Mr Diaz reckons that a onepercentage-point increase in provisions on the rest of the portfolio would force listed banks
to come up with about €16 billion, or more than 10% of their current tangible equity. (This is
on top of the extra provisions demanded in February.)
Senior Spanish bankers say that mortgage arrears are likely to stay relatively low for several
reasons. First, mortgage-lending in Spain gives banks a claim on all of their borrowers’
assets, so those who are falling behind with payments cannot just hand over the keys and
walk away. Second, family networks and a large informal economy provide incomes to large
numbers of people who are officially listed as unemployed. Third, most Spanish mortgages
have variable rates; as long as the ECB keeps rates low, mortgages are affordable.
But there are less benign explanations, too, for low NPLs. Think back to the efforts being
made in that Madrid bank branch. Lenders are under political pressure to avoid foreclosures.
Some banks are restructuring loans by, for instance, switching customers to interest-only
mortgages, which would cut the monthly repayments by about a half. Others are
consolidating credit-card debts and personal loans, by adding them onto existing
mortgages. Forbearance of this sort can, in moderation, ease the pain of a downturn by
helping people who are in temporary difficulties. If taken to excess, however, it can simply
store up bad loans for later and make the eventual clean-up far costlier.
How big a hole there is in Spanish banks depends on how deep the recession is and on how
much profit banks can generate to absorb losses. Analysts at Barclays Capital reckon that
uncovered losses (after accounting for a year’s worth of earnings and existing provisions)
could range from zero to €137 billion in the case of a deep downturn, with the bulk of the
losses still stemming from exposure to property developers. The large international banks
look less vulnerable, thanks to their diversified profits. But the government will be on the
hook for some losses at nationalised lenders; and if the worst were to come to pass, listed
Spanish banks would have to hope that their shareholders are as willing to forgive their
transgressions as they seem to be with their clients.
Task 1: Spain’s property market
Explain:
1.
2.
3.
4.
Wobbly foundations
non-performing loans
name different types of loans
listed banks
Matching:
1. to set aside
2. many loans
3. to set aside
4. unemployment
5. the decline in
6. small increases in
7. mortgage
8. To fall behind
9. People officially listed
10. to avoid
11. to consolidate credit-card debts
12. to ease the pain
13. If taken
14. losses stem from exposure to
A. bad debts are painful
B. with payments
C. and personal loans
D. foreclosures
E. pile up
F. as unemployed
G. to excess
H. of a downturn
I. provisions
J. interest rates
K. has soared
L. billions
M. property developers
N. Arrears
Task 2: International banking /internet source/
1.
2.
3.
4.
5.
6.
7.
8.
What is international banking?
Name a few reasons to bank internationally.
What will the opening of an account in a reputable bank include?
Who are the Gnomes of Zurich?
What are the hazards of banking internationally?
What is anonymous banking?
What is tax evasion?
What is money laundering?
Letter of credit:
Fill in the following text using the following vocabulary:
Issuing trade credit transfer L/C buyer fee advising
goods
money
seller
A:…………………is a way of arranging ………………with a maximum of security for the
…………….. Before any dispatch of ……………..the exporter/seller awaits the
……………´s opening of a L/C. The L/C is issued by the …………………………..bank, but
before that the bank performs a …………..review of the applicant. When the L/C is opened,
the customer instructs his bank to …………………a certain amount of money to the
……………………bank. For this service the bank will charge a …………………………….
The L/C tells the exporter exactly what he must do in order to have the
………………………………paid out.
Answer Key:
Task 1 Explain:
1.
2.
3.
4.
Wobbly foundations – not steady
non-performing loans – on which customers have fallen into arrears 3 months or more
name different types of loans /mortgages, personal loans, loans to businesses/
listed banks
Matching:
1. to set aside provisions
2. many loans pile up
3. to set aside billions
4. unemployment has soared
5. the decline in interest rates
6. small increases in bad debts are painful
7. mortgage arrears
8. To fall behind with payments
9. People officially listed as unemployed
10. to avoid foreclosures
11. to consolidate credit-card debts and personal loans
12. to ease the pain of a downturn
13. If taken to excess
14. losses stem from exposure to property developers
Task 2
1.What is an international bank? a financial entity that offers financial services, such as
payment accounts and lending opportunities, to foreign clients synonym: offshore banking
Benefits of International Banking
International banking is often used to invest in developing economies or for tax- and businessplanning benefits.
Hazards of International Banking
Corruption and the economic instability of a country are some of the hazards associated with
international banking.
Read more: What is the definition of international banking? | Answerbag
http://www.answerbag.com/q_view/1866816#ixzz2Noosx700
2. Few reasons to bank internationally: use international banks to shelter their money from
their home country's income and estate taxes
4. What will opening an account in a reputable bank include

The bank will confirm your identity and the identities of anyone who has an
ownership interest in your money.




Like a good father, the bank will ask you about your intentions. Why do you need an
international bank account? What does your business do?
The bank will inquire about the origin of your deposits, especially very large ones.
Where'd you get that $756 million, son? Hopefully not from that big heist in
downtown Rome.
The bank will ask for references. Are you a reputable individual or company?
The bank will analyse how risky a customer you would be. Can you or your company
pay back loans?
5.What are the hazards of banking internationally:
Hazards of International Banking
Corruption and the economic instability of a country are some of the hazards associated with
international banking.
 currency can change value
 Some foreign banks are not insured in US
 Collateral damage /Unintended damage, injuries, or deaths caused by an action,
especially unintended civilian casualties caused by a military operation./=vedlejší
škody
 Abusive tax shelter – zneužívající danové zvýhodnění
Letter of credit:
Fill in the following text using the vocabulary from the power point:
A letter of credit…is a way of arranging export …trade……………………with a
maximum of security for the …, seller………………….. Before any dispatch of
…goods…..the exporter awaits the ……, buyer, …´s opening of a L/C. The L/C is
issued by the ……issuing, …………..bank, but before that the bank performs a
…credit………..review of the applicant. When the L/C is opened, the customer
instructs his bank to …transfer, ………………a certain amount of money to the
…advising…………………bank. For this service the bank will charge a
……fee………………………. The L/C tells the exporter exactly what he must do in
order to have the …money………………paid out.