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Credit crunch squeezes Spain

Thursday, January 17, 2008

Source: Jaimie Kanwar

The international credit squeeze has hit Spain's booming economic growth...

Inflation in December--4.3 percent--was Spain's highest level in a decade. Unemployment also rose last month. Home prices in many areas have begun to drop, causing some families to owe banks more than their home value. Several property developments have been stopped; recently completed projects are experiencing falling prices and buyers who are writing off their downpayments and dropping out.

The general slowdown has caused Europe's fifth-largest economy to lower its estimate for 2008 growth from 3.3 percent to 3.1 percent. In Madrid, the country's banks and the Bank of Spain, which acts as financial regulator, say the lending business is strong, with just 0.9 percent of €1,700 billion in outstanding loans labeled as non-performing.

According to the Bank of Spain, non-performing real estate loans have risen by 48 percent in the past year to €1 billion and property developers currently have €293 billion in bank loans. Banks have allotted provisions to cover three times the current amount of bad loans, the Times said.

However, regional and national savings bank managers in Igualada, a town of 38,000 that has seen construction slow, say things are not as sunny as they may seem. Spanish developers raise bank credit based on downpayments; as home prices drop, it's unclear how many units have been sold or how many sales will fall through, according to the banks.