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Despite E.U. rescue fund, Spain struggles with soured private loans

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By Neil Irwin
Washington Post Staff Writer
Wednesday, May 12, 2010

SESEñA, SPAIN -- Blocks of modern red-brick apartment towers rise over the desolate boulevards of this Madrid suburb. Weekend afternoons fill the streets of most Spanish towns with families, but the only sound here Sunday was the occasional gust of wind whipping in from the surrounding arid fields.

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This ghost town, made up of 5,100 apartments built in the past eight years, is evidence of a credit meltdown that has wreaked havoc in Spain -- and that increasingly contributes to the wider European debt crisis. Seseña also shows why the massive program announced by European leaders Sunday to arrest the continent's financial crisis may do little to address its underlying causes even though the $1 trillion rescue package has succeeded in stemming panic in world markets.

Unlike Greece, where the financial crisis first erupted, Spain doesn't have excessive government debt.

Instead, Spain faces an overhang of private lending from the recent boom years. Many of the country's regional banks are weighed down with bad loans, especially for housing construction. Those banks have been slow to write them off and raise new capital, making it hard for them to fuel economic growth by extending new credit.

The threat, however, goes beyond that. After recent bank bailouts in countries such as the United States, Britain and Switzerland, global investors widely assume that governments, including Spain, will continue to save failing banks. That means the problems of Spain's banks are ultimately a problem for the Spanish government itself. In turn, that makes Spain acutely vulnerable to the recent run on the debts of European governments such as Greece and Portugal.

But because the Spanish economy is nearly five times the size of either of those two, a Spanish default would have a far greater impact on the global economy.

"Our problem is not public indebtedness but private indebtedness," said Santiago Fernández de Lis, a partner at Analistas Financieros Internacionales, a financial research outfit in Madrid. "The banking system has to reform in order for the economy to move forward because without credit, there will be no growth."

Which boils down to this: Something must be done with places like Seseña.

A building crisis

Spanish banks were aggressive in making development loans during the housing boom, which lasted until 2007. When the demand for homes abruptly plummeted, developers were left with more land and buildings than they knew what to do with. The parallels with the U.S. housing meltdown are many.

Seseña was built by Francisco Hernando, who rose from extreme poverty -- he cleaned sewers as a young man -- to become one of Spain's wealthiest men. He envisioned a complex of quality apartments, affordable to working-class families, that might house 40,000 people. He set out to build in the fields half an hour south of Madrid.

Many of the buyers, however, ended up being speculators who often bought multiple units. Some went unsold entirely. Thousands of apartments remained vacant. An entire cluster of eight-story buildings is still fenced off, metallic shutters down on all the windows.

For the residents who did buy into the development, conditions can be difficult. With so many vacancies, the bus comes only twice each morning -- and there's no nearby train station. There is no local grocery store or doctor's office. Few of the street-level shops that were promised have yet materialized.


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