Save the banks to save the economy – Spanish Edition

“Spanish housing in the 2000s was the U.S. experience on steroids. During the early part of the decade, house prices soared 150 percent as the household debt-to-income ratio doubled. When house prices collapsed, the home equity of many Spanish home owners was completely wiped out, setting in motion a levered-losses cycle even worse than the one in the United States. The Spanish economy foundered, with unemployment topping 25 percent by 2012. Spanish home owners had even worse problems than their American counterparts. As in the United States, house-price declines destroyed home equity, and many home owners were evicted from their homes. But in Spain a law from 1909 stipulated that most Spanish home owners remain responsible for mortgage payments—even after handing over the keys to the bank. If a Spaniard was evicted from his home because he missed his mortgage payments, he could not discharge his mortgage debt in bankruptcy. He was still liable for the entire principal.1 Further, accrued penalties and the liabilities followed him the rest of his life. And bankruptcy registers made it difficult for him to lease an apartment or even get a cell phone contract.

“As a result of these laws, mortgage-debt burdens continued to squeeze Spanish households even after they were forced out of their homes. Suzanne Daley of the New York Times reported on the story of Manolo Marban, who in 2010 was delinquent on his mortgage and awaiting eviction. He expected no relief from his $140,000 mortgage even after getting kicked out: “‘I will be working for the bank the rest of my life,’ Mr. Marban said recently, tears welling in his eyes. ‘I will never own anything—not even a car.’”3 Hard-handed Spanish mortgage laws spurred widespread condemnation and social unrest. Locksmiths and police began refusing to help bankers evict delinquent home owners.4 In 2013 Spanish firefighters in Catalonia also announced that they would no longer assist in evictions, holding up a sign reading: “Rescatamos personas, no bancos”—we rescue people, not banks.

“Even outsiders recognized the harshness of Spanish mortgage laws: the European Union Court of Justice handed down a ruling in 2013 demanding that Spain make it easier for mortgage holders to escape foreclosure by challenging onerous mortgage terms in court.5 The Wall Street Journal Editorial Board—not known as a left-leaning advocate for indebted home owners—urged Spain to reform mortgage laws to “prevent evicted homeowners from being saddled eternally with debt.”6 A number of opposition parties in the Spanish parliament attempted to reform the laws governing mortgage contracts. But in the end, nothing was done. As we write, harsh Spanish mortgage laws remain on the books, and Spain has endured a horribly severe recession, comparable to the Great Depression in the United States.

So why wasn’t more done to help Spanish home owners? Lawmakers in Spain made an explicit choice: any mortgage relief for indebted households would hurt Spanish banks, and the banking sector must be shielded as much as possible. For example, if lawmakers made it easier for home owners to discharge their debt by walking away from the home, more Spaniards would choose to stop paying and walk away. This would leave banks with bad homes instead of interest-earning mortgages, which would then lead to larger overall economic costs. The head of the mortgage division at Spain’s largest property website put it bluntly: “If the government were to take excessive measures regarding mortgage law, that would affect banks. It would endanger all of the hard work that has been done so far to restore the Spanish banking system to health.

“The New York Times story by Suzanne Daley reported that “the government of Jose Luis Rodriguez Zapatero has opposed . . . letting mortgage defaulters settle their debts with the bank by turning over the property. . . . Government officials say Spain’s system of personal guarantees saved its banks from the turmoil seen in the United States.” The article quoted the undersecretary of the Housing Ministry: “It is true that we are living a hangover of a huge real estate binge. And it is true that far too many Spaniards have excessive debt. But we have not seen the [banking] problems of the U.S. because the guarantees [requiring Spaniards to pay their mortgage debt] here are so much better.

“Still, the extreme preferential treatment given to banks under Spanish bankruptcy law was not enough to protect the banking sector. Spanish banks steadily weakened as the economy contracted. In July 2012 the Spanish banking system was given a $125 billion bailout package by Eurozone countries. And it was actually backed by Spanish taxpayers.9
So did the policy of protecting banks at all costs succeed? Not at all. Five years after the onset of the financial crisis, the recession in Spain is one of the worst in the entire world. If protecting banks at all costs could save the economy, then Spain would have been a major success story.” “Still, the extreme preferential treatment given to banks under Spanish bankruptcy law was not enough to protect the banking sector. Spanish banks steadily weakened as the economy contracted. In July 2012 the Spanish banking system was given a $125 billion bailout package by Eurozone countries. And it was actually backed by Spanish taxpayers.9

So did the policy of protecting banks at all costs succeed? Not at all. Five years after the onset of the financial crisis, the recession in Spain is one of the worst in the entire world. If protecting banks at all costs could save the economy, then Spain would have been a major success story.”

Excerpt From: Sufi, Amir. “House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again.”

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