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With Greece in flux over whether it'll remain in the eurozone, other weak economies like Spain are feeling the heat.
The worst could be yet to come in Spain — not because of public debt, but because its banks are still laden with unpaid real estate loans, putting both the banks and the housing market in jeopardy. Real estate prices in Madrid are still high, though salaries are frozen and unemployment soars. When Ireland's housing bubble burst, prices dropped more than 40 percent. But in Spain it's an 18 percent drop on average.
Spanish banks own lots of property, and they haven't yet written off the losses.
The problem with Spain is private debt, and that's what's weighing down on the banks — the part that might not get repaid.Gayle Allard, IE Business School
"They're not talking about it so as not to provoke fear," says Gayle Allard, an economist at Madrid's IE Business School. "Housing prices have hardly fallen. What that tells you is that the banks are just hanging onto those assets and not unloading them, because the minute they do, their balance sheets are really going to look bad. The value of housing will really collapse. It hasn't happened yet."
What's frightening, Allard says, is that Spain has not yet hit rock bottom in this crisis — not until the banks reckon their losses.
When EU leaders in Brussels look southward across Europe, they tend to cringe most at sovereign debt — countries like Greece, Portugal and Ireland that can no longer afford to service their loans. Spain, by contrast, has much lower government debt, Allard says.
"The problem with Spain is private debt, and that's what's weighing down on the banks — the part that might not get repaid," she says.
Alvaro Nadal, the economy secretary for Spain's Popular Party, which is forecast to win national elections on Nov. 20, says EU leaders are wrong to focus on banks' vulnerability to Greek debt. He wants broader help from Brussels to keep Spain's banks afloat.
"If it's a general capitalization, and each country can use it to solve their internal problems, domestic problems they've got in their balance sheets in banking, for example, real estate in the case of Spain, or sovereign debt in other countries, OK. But the exercise we are doing right now in Brussels is just thinking about sovereign debt," Nadal says. "And that's what has been mistaken."
This past week, Spain's central bank warned of "troubled exposure" to real estate. Many mortgages and loans to real estate developers are only now coming due. Defaults are on the rise. Already 7 percent of all bank loans in Spain go unpaid.
"Big banks, I think should be OK," Allard says. "It's the small ones, these savings banks, who have so many of their assets in mortgage loans, that they're going to be scrambling to try to keep them propped up."
Prime Minister José Luis Rodriguez Zapatero said his government will help small banks restructure, if needed. But the Spanish election is nearly two weeks away. Zapatero isn't running, and the opposition Popular Party has a double-digit lead in the polls. Spain's banks might be on the precipice, but any action to save them will likely have to wait until after the election.