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Spanish Real Estate Bubble Bursts, with First Big Bank Default

July 15, 2008 (EIRNS)—The Spanish real estate sector, often described as the "sick man of Europe's housing branch," went into critical condition, with the declaration of bankruptcy of Martinsa Fadesa, one of Spain's biggest real estate banks, last night. The bank had failed to get a bridging loan of EU150 million, which it needed to secure another urgent refinancing loan of EU4 billion. The fact that the loan of EU150 million failed, is indicative of the situation, as negotiations had already begun several weeks ago in order to prevent the full default of Martinsa Fedesa. Especially the three biggest creditors of the troubled bank, La Caixa, Caja Madrid, and Banco Popular, had hoped to save Martinsa Fedesa, because they are themselves troubled. The deadline for the loan expired on July 7, and when the bank tried to get state support, it was denied.

The bankruptcy of Martinsa Fedesa is now over a debt of EU5.4 billion, but many commentators say that is not the full picture. In any case, many other banks in Spain—as also outside Spain—involved in Spanish real estate, are right behind Martinsa Fadesa on the brink. Throughout the country, about 700,000 homes cannot be sold. In Castilla-La Mancha, Don Quixote's region, almost 70% of houses built over the past three years are still unsold. Many other European banks countries are involved in the Spanish housing bubble.

Anticipating the bursting of the bubble, Prime Minister José Luis Zapatero Rodríguez last week blamed the European Central Bank for making matters worse by raising interest rates in the teeth of the crisis, calling the move "irresponsible." More than 98% of home loans in Spain are priced off floating rates linked to Euribor, which has risen 145 basis points since August.

Similarly in Eastern Europe, there is high exposure to the exploding mortgage loan interest rates. Insiders have pointed out that, several hundred thousand Eastern European citizens have taken adjustable-rate loans from West European and other banks, especially from Austria, Switzerland, Sweden and Finland.