By Ambrose Evans-Pritchard
Last Updated: 1:29am BST 03/10/2007
SourceThe Valencia property developer Llanera has become the first high-profile victim of the credit crunch in Spain, declaring insolvency yesterday after failing to meet payments on €748m of debt.
The fashionable builder, known for its links to Charlton Athletic Football Club, was unable to reach agreement with Lehman Brothers and other banks on a refinancing deal, a sign that foreign creditors are no longer willing to underwrite Spain's property market.
The rating agency Moody's said default rates in Spain could jump from 0.37pc to 5.5pc if the economy suffers a hard landing, with an outside risk that values could fall by 20pc.
Alberto Matellan, an economist at Inverseguros, said arrears would never reach US levels because of Spain's "solidarity" culture. "The extended family steps in to help meet the payments," he said. Defaults are very rare."
Moody's said property prices had risen 280pc since 1997. While most banks are well able to weather a downturn, the regional cajas, or savings banks, are vulnerable. Many of the cajas have leveraged their risk by launching their own property ventures, much to the horror of the Bank of Spain.
The governor Miguel Fernandez Ordonez said euro membership was the root of the trouble, causing the economy to overheat badly and pushing house prices 35pc above their sustainable value. Household credit grew at a 16.4pc rate in June, and corporate credit at 24.5pc.
"The single monetary policy has meant that excessively loose conditions for our economy have been almost continuous. A less relaxed tone would have been better for our needs," he said.
Interest rates halved almost overnight when Spain joined the euro.
Llanera said it faced "extreme difficulties" as a result of reliance on short-term borrowing. Credit costs have shot up since the collapse of the market for commercial paper and CDOs (collateralised debt obligations).
It blamed the squeeze on the "evolution of the Spanish property market and the relentless increase in Euribor". The Euribor rate, used to price floating rate mortgages in Spain (98pc of the total), has jumped to a six-year high of 4.72pc.
Eight rate rises by the European Central Bank since December 2005 have taken their toll, but the final blow was the sudden widening of Euribor spreads by an extra 70 basis points over ECB rates since the summer squeeze.
Almost 800,000 homes were built in Spain last year, leaving a glut of 300,000 properties in the market.